Emerging Markets Insights

Latin America continues to look strong as 2012 gets rolling. Brazil’s growth remains subdued, but stimulus efforts are beginning to have an effect, and Mexico continuing to spend heavily in the run-up to the July presidential elections. Meanwhile Peru and Colombia continue to perform well despite a volatile international environment.

• Argentina: Risks to multinationals are growing as Argentina doubles down on trade restrictions in response to deteriorating economic fundamentals
• Brazil: Stimulus efforts are beginning to take effect, but Brazil is not out of the woods yet as industrial output continues to stall
• Chile: Chile is poised to weather global economic volatility with strong macroeconomic fundamentals and a sovereign wealth fund
• Colombia: Retailers and manufacturers remain confident as the economy continues to grow, buoyed by strong investment and stable commodity prices
• Costa Rica: Fragile public finances and a weakening economy have led the government to raise taxes, imperiling future foreign direct investment
• Dominican Republic: Economic decline in Europe and new immigration laws will have adverse effects on the tourism, agriculture, and mining industries
• Ecuador: Government spending and stable commodity prices will support growth in 2012, but overexposure to oil continues to present risks
• Mexico: Better-than-expected US growth has not stopped government authorities from pursuing stimulative policies to boost consumer spending
• Panama: An increasingly unpopular Martinelli administration will face a cooling but still high-performing economy in 2012
• Paraguay: Paraguay is developing a two-track economy with consumption thriving as exports falter
• Peru: President Humala is doubling down on his centrist, pro-business policies by pushing out leftists from key government posts
• Uruguay: Uruguay is at the mercy of economic developments in Argentina and Brazil, with current trends pointing to a slowdown in 2012
• Venezuela: Chávez’s erratic decision-making indicates an increasingly toxic business environment for MNCs

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The Egyptian pound is likely to devalue by up to 20% against the dollar in 2012. The currency’s slide in value represents the biggest threat to the Egyptian economy.

• Egypt’s government is running out of hard currency to prop up the pound, which will result in a devaluation
• Devaluation is likely to take place following the presidential election at the end of June 2012
  • Egyptian authorities want to avoid an economic crisis that could delay elections

The currency is supported by unsustainable conditions

• Capital flight: Egypt’s revolution drove a 60% contraction in FDI. The tourism sector, a key industry that drives foreign currency accumulation, reported a 30% reduction in revenue last year. Meanwhile, portfolio investors sold more than US$7.5 billion in Egyptian T-bills in 2011, comprising more than 25% of foreign holdings
• Import dependence: As the largest wheat importer in the world, Egypt has a US$23.6 billion trade deficit, adding pressure to the local currency
• Unsustainable monetary policy: The central bank spent US$18 billion, 50% of its total reserves, supporting the currency in 2011

Egypt is running out of funds to stabilize the local currency

• The US$23 billion budget deficit will expand because of new subsidies and weak foreign investment
• The central bank required a US$1 billion loan from the military earlier this year, which is an unusual step that exposes a lack of funding for the institution
• Most of the US$10 billion pledged by the G8 and GCC countries has not yet reached Egypt. Donor countries want to see a greater level of economic stability before releasing funds
• Renewing discussions with the IMF over a US$3.2 billion loan will not make a significant difference in funding if an agreement is reached

Political and social factors undermine the currency’s outlook

• Political uncertainty is undermining the outlook for the currency as investors, both domestic and foreign, do not want to hold Egyptian pound-denominated assets
• To reduce uncertainty, Egypt must achieve several political milestones this year, including presidential elections and the writing of a new constitution
  • The constitution will define the military’s future role in Egypt
  • An unclear transition timetable from military to civilian rule could deepen local tensions
  • The same underlying factors that led to the revolution, such as high inflation and unemployment, are still serious concerns and may be drivers of continued instability

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Countries across Asia are beginning to see their growth deteriorate as ongoing problems in the eurozone, persistent malaise in the US, and a government-engineered slowdown in China undermine the region’s prospects. Several ASEAN countries have already begun cutting interest rates to spur growth; however, it is unlikely that their efforts will be sufficient to halt the regional slowdown

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Country and regional heads are increasingly turning their attention to their government engagement function. Government decisions, from regulatory issues to government sales, can deeply impact the bottom line.

Companies wrestle with a variety of questions when it comes to running successful government engagement functions. These questions can be broken down into three principal challenges:

1. Ensure the company invests the right amount in government engagement.

2. Generate positive engagement when government actors are initially unreceptive.

3. Capitalize on the abilities of third parties without putting the company at risk.

In response to these challenges, most companies resort to a reactive, problem-solving approach. In order to succeed, the government engagement function should reframe traditional ROI evaluations to embrace the broader goals of government engagement, thus creating a proactive decision framework. This new ROI approach applies to each of the three major challenges companies face:

1. Justify Your Investment – First understand how to tailor your investments to the realities presented by each country’s business and political environment.

2. Earn Your Influence – Make sure you time the ―I‖ well in ROI.

3. Discipline Your Delegates – Do not take short cuts with third parties. A low ―I‖ does not guarantee high ROI if the ―R‖ turns out to be negative.

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Reuters recently released an interactive infographic depicting the evolution of the middle-class around the world. Emerging markets such as China, India and Indonesia are estimated to increase Asia’s share of the global middle-class to 64% and account for over 40% of global middle-class consumption by the year 2030.

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Full article on MarketWatch

Russia’s acceptance into the World Trade Organization last month didn’t just mark an end to nearly two decades of negotiations, but opened a door to free up global trade with a nation that is one of the world’s largest oil producers and home to the globe’s biggest natural gas reserves.

And if the impact on the last large economy to join the organization — China — offers any clue, the outlook for Russian trade and its economy has much improved.

On Dec. 16, the World Trade Organization approved Russia’s membership. WTO trade ministers have said Russia’s accession to the organization will bring the nation more firmly into the global economy and make it a more attractive place to do business.

“Russia took 18 years to complete its WTO negotiations, but in the end it walked away with a great deal,” said Martina Bozadzhieva, senior analyst for Central and Eastern Europe (CEE) & Russia at Frontier Strategy Group. “Over the long term, WTO accession will increase the competitiveness of the Russian economy and [foreign direct investment] inflows.”

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The following post is from Frontier Strategy Group expert advisor, Richard Brubaker’s All Roads Lead to China blog. The post is called Quality in China. Is it Valuable Enough to Pay for?

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While the typical conversation about “quality” in China will be one of manufacturing failures, I was asked by a good friend to comment about my thoughts on whether or not the “Chinese” market was ready as a consumer of quality.

A topic that I would say I brush past on a regular basis as in the last few years it is easy to see there is a market of Chinese consumers who are looking to enjoy a higher level of standard in products (middle market and luxury), but more widely there was a mass who were engaging in what I call fear based consumerism as a result of the countless consumer scandals in China.

And in answering her questions below, I really felt it was best to focus on the later group because (in my mind) these are the consumers that are going to be far more interesting, stable, and loyal in the future. And that for all the hub bub of China’s growth in luxury, it will ultimately be the middle market where firms focused on “quality” should be focusing their efforts.

Question 1: How will Chinese consumers be thinking about Quality (Durability, Safety, Longevity, etc) for products in 3-5 years

This is ultimately the question that will drive brands nuts going forward because there are going to be some very clear markets that develop, and some which pop up and then die quickly, all depending on the “consumer”.

If one views the government as a consumer who is looking to by “quality” for their projects (think cleantech, healthcare, security, etc). This is a very large market already, and is one where the “buyer” is looking for quality (even in the face of domestic innovation policies), and it is a market that is largely owned by foreign firms like CISCO, GE, and NALCO

If the market is of the average consumer, this will obviously re-frame a bit, but buying quality if becoming something important to them, particularly if one considers food, children, and healthcare markets. In these markets, there is a lot of anxiety, and foreign pharma and overseas Organic labels are selling at a premium to the local alternatives.

… and this trend will only continue consumer income increases, awareness of local product safety issues increases, and access to “quality” items increases.

Question 2: Will they pay more

Yes. They already are.

Looking at food alone, you have markets for local organic and imported organic, which both carry a premium.

In areas of education, parents are more likely to pay the 20% premium to send their kids to Disney English, than to the even the best nationally branded schools, and there are parents who are (currently) willing to spend the 20% premium to send their kids to the nationally branded English schools than to a local English school

.. and in the area of healthcare, Shanghai and Beijing hospitals have up to 50% “waidi” patients who have opted not to visit local/ provincial options. They are seeking the best in care, and are willing to pay (above and below the table) what it takes. Even if that means selling land.

Question 3: What will be top of mind for them

Depends on category, but product safety will be one of the biggest drivers for consumers to seek out, and remain loyal to, a product. However performance and durability will also be at the top of the list. There will be a point where consumers locally understand that there are some products whose short term savings will have a much higher long term cost due to their design, materials, etc, and these consumers will begin moving towards quality in that regard as well (even at a premium) so as to reduce their own time suck.

Question 4: How should companies be thinking to cater their offerings towards these needs

Companies that succeed will be the ones that understand the undercurrents the best. A lot of firms who have entered China do so without considering the big picture. They have researched a specific market, or group of people, in a vacuum environment without considering the what ifs, and a year later they are shuttering operations (or hemorrhaging cash keeping it on life support)

Entering the market doesn’t just require a good product, it also requires good technical support (for the development of future products) and after sales service (for when things go wrong), and anyone who is operating a model without either is either going to burn out quickly or have a pack of angry consumers banging on their door. Either way, they are not developing a loyal consumer base.

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During the final weeks of 2011, Frontier Strategy Group spent a great deal of time speaking with emerging markets executives to understand their top priorities for 2012. The chief concern for nearly every executive we spoke with largely boils down to, “How can I maintain growth in the face of market deceleration?” Corporate expectations are roughly in line with the performance achieved in 2011, despite increasing external headwinds, uncertainty, and volatility.

As we began to unpackage and dig a bit deeper into these concerns, we identified four very common issue sets that we will address in our quarterly global business analysis and executive forums in 2012:

Responding to Local Competitors

• What are the most successful Western MNCs doing to counter the threat of local and emerging markets-based rivals?
• What are the most successful tactics for responding to price competition while preserving margins?
• How can multinationals best leverage their strengths and mitigate their weaknesses to beat local companies in the war for talent?

Streamlining the Strategic Planning Process

• How can I accelerate processes and ensure that time spent on strategic planning yields strong returns?
• What are the best mechanisms for collecting local market insight from my team?
• How can I more effectively make my case to the corporate center?

Walking the Channel Management Tightrope: Direct vs. Indirect

• What is the right balance between direct and indirect sales?
• How have leading companies managed the transition from indirect to direct, or vice versa?
• When is the right time to terminate a distributor relationship, and how can I minimize disruption through the transition?

Managing the M&A Lifecycle

• When is inorganic growth preferable to organic growth?
• What are the best (and worst) practices for identifying and screening potential targets?
• How can I more seamlessly integrate the new team and infuse my “corporate DNA?”

What do you think will be the most important challenge facing emerging markets executives in 2012? Give us your feedback by clicking on this link.

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Ma Ying-jeou has been reelected as Taiwan’s president for a second term. Despite his victory, he faced close competition from Democratic Progressive Party candidate Tsai Ing-wen. The clip above, from The Wall Street Journal, discusses the impact of Ma Ying-jeou’s reelection on cross-strait relations between Mainland China and Taiwan.

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