Worl's growth generators. Emerging markets grow internally, expand internationally
By David Oakley
Published: June 7 2011 17:03 | Last updated: June 7 2011 17:03
This decade has been to a large degree the success story of the emerging markets. Even taking the financial crisis into account, companies and markets in the 150 countries that make up this disparate and broad group have been the growth generators of the world.
Companies such as América Móvil, the Mexican telecoms giant, Modelo, the Mexican brewer, and Samsung, the South Korean electronics group, have become world beaters – outgrowing and often outsmarting their western rivals in the way they have developed technology and managed their businesses.
But it is not just the big multinationals that have seen a transformation this decade. Small and medium-sized businesses are also growing fast in these economies, particularly in places such as China, India, Brazil and South Korea, where thriving domestic markets are helping them expand.
Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, the investment banking arm of Royal Bank of Canada, says: “Emerging-market companies are today often much stronger, more stable and not so leveraged as their western rivals. Many are now international market leaders as growth in their domestic markets has underpinned profits and sales.”
Ten years ago, many of the emerging-market companies were relatively primitive, tending to grow organically through cheap labour, producing large amounts of goods and selling them at knockdown prices to beat their competitors.
This was how China, the world’s biggest emerging market and the global powerhouse in terms of growth and size, became the force it is today.
In India, Brazil, South Korea and the other smaller trading economies of Asia, such as Malaysia, Taiwan and Thailand, the story has been the same – companies in these markets produced goods that were cheaper than those of their industrialised world rivals.
But now emerging-market companies have moved to the next stage of their development as they have become more like the mature blue chips in the US and Europe, where growth has to be achieved in different and more sophisticated ways.
As one chief executive of a large emerging-market company in Asia put it in a recent comment to clients: “There comes a point when there are only so many goods a company can produce and organic growth begins to slow. To grow, they have to become more acquisitive.”
In China, the benchmark for the rest of the emerging-market world, company acquisitions and takeovers have increased in recent years. One of the most high profile was Geely, the Chinese car manufacturer that acquired Volvo last year in a move that demonstrated how established European companies are now prey for Chinese acquisitions. Lenovo, the Beijing computer company that bought IBM’s PC business, is another example of the growing confidence of the Chinese to expand into developed markets.
In other emerging markets, too, the biggest corporates, such as Tata, India’s largest business group, and Mexico’s América Móvil have become more acquisitive. The latter has expanded across borders, while Petrobras, the Brazilian oil company, is challenging western companies in foreign markets.
However, as with bigger, more mature companies, growth may be harder to come by. For the largest companies, the double-digit increases of the past may be difficult to repeat.
In a technical sense, the emerging-market companies have also sought to climb the value chain with new products, services and brands. Indeed, today China and other Asian economies are leading the way with the development of high technology. In India it is cars, while Brazil’s financial services sector has made great strides.
The most successful emerging markets are no longer about low-cost manufacturing, but about competing with the west on level terms. Family-run businesses are not so prevalent, and research and development and effective management have become more important.
The best emerging-market companies have not only become more similar to their western rivals, but they are now also competing with them. In many cases, west has met east as companies in the emerging and developed markets have joined forces to boost growth and the bottom line. The number of emerging-market companies in the Financial Times Global 500 has jumped to 127 in the latest list to be published this month, compared with 120 last year and only 32 in 2002.
However, all is not rosy. The financial crisis took its toll on many emerging-market companies, notably overborrowed Russian resources groups such as Rusal, the aluminium producer.
Mexican companies, such as Cemex, the cement manufacturer, also suffered as the country paid a heavy price for its close financial links with the US. Asia – and especially China – has seen a credit boom that has forced some countries to tighten monetary policy and banks to increase reserve requirements.
Brazil, meanwhile, had to introduce capital controls and raise interest rates as concerns mounted that its boom could end in bust.
In spite of these issues, emerging markets are the drivers of global growth as the industrialised economies of the US, Europe and Japan stagnate.
Brett Diment, head of emerging-market debt at Aberdeen Asset Management, the fund management group, says: “In the long term, the emerging markets remain a much better bet than the developed markets. In the developed world, there are risks of a double-dip recession and stagnation. The recovery in the emerging markets looks strong.”
It is their domestic economies that are driving emerging-market growth. The International Monetary Fund forecasts that developed countries’ gross domestic product will grow by about 2.5 per cent annually over the next three years, but the emerging world is forecast to grow by more than double that, at 6.5 per cent, over the same period. 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 Honda, the motorcycle manufacturer, Godrej, a producer of consumer products, and cement makers such as India Cements and Grasim.
Sooner or later, however, thoughts will turn to overseas growth. Long-term strategies for emerging-market corporates, therefore, are increasingly hinging on acquisitions, as partnerships matter in a globalised world.
Scores of joint ventures have been set up between developed-world and emerging-market corporates in a range of sectors. An example of such a joint venture is Merck, the US drugs maker, and Sun Pharmaceutical, of India, developing and manufacturing new combinations of branded drugs together.
Cross-border deals can backfire. Tata bought Corus, the European steel group that remains India’s largest foreign acquisition, before the financial crisis, but was hit hard as the value of the assets dropped.
Cultural gaps between emerging markets and developed markets can also cause strain. Chinese managers feel as alien on the banks of the river Tyne in north-east England as western executives do on the Yangtse.
Then there is the issue of 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, the US technology company, from Bain Capital, the US private equity group, and Huawei, the Chinese telecoms equipment maker, failed in 2008 when Washington objected. In Europe, the ambitions of Gazprom, the Russian state gas company, to expand into the EU have been constrained by political concerns.
Yet, overall, most strategists say emerging-market companies can continue to expand, even if short-term opportunities for growth look more challenging than ever.
Worries over inflation have started to ease, particularly in China, partly as a result of tightened monetary policy. Economic growth in China has slowed to 9.6 per cent this year, compared with 10.3 per cent last year, which most strategists said was unsustainable. The big economies of Brazil and India also look in better shape, and fears of a bubble are receding.
The growth success story looks set to continue. |
