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Everything you ever wanted to know about doing business in emerging economies… but were afraid to ask

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Should you bribe local officials? Is it better to employ local managers or ship in trusted UK staff? Is Nigeria really the new India? Business advice on the BRIC countries and other emerging economies

Follow me: @sophiehobson and @LondonLovesBiz

Did you know that Nigeria now consumes more Guinness than Ireland?  Or that an estimated 10 million people per year are moving into the middle class in Asian countries excluding China?

We bang on about doing business with emerging economies a lot here at LondonlovesBusiness.com. But for good reason: you would be short-sighted not to even consider it. The IMF has forecasted its growth projections for the UK down to only 0.6 per cent throughout 2012. China, meanwhile, is expected to enjoy 8.2 per cent growth in that period; India 7 per cent; sub-Saharan Africa 5.5 per cent.

If you want your business to grow, you need to consider tapping into these markets, because sales closer to home are looking much harder to come by. (Unless, that is, you’re lucky enough to be an insolvency consultant.)

With all this in mind, I recently attended a panel discussion at the Economist’s CFO Summit with David Fry, PepsiCo’sChief Financial Officer for North and South East Asia, plus David Heginbottom Group Treasure of Diageo, and Mark Smith, Global Treasurer, Head of Tax, Pensions and Insurance, Unilever.

Not a bad bunch of brains, you might rightly infer, from which to learn about doing business in the emerging economies.

So here are the answers to all those questions you’ve been itching to ask about business in emerging economies. And if there’s anything we’ve missed, tell us in comments below and we’ll do our best to find you the answers.

Can you trust businesspeople in the emerging economy countries?

It’s commonplace for UK businesses to partner with local businesses when they enter a foreign market, by forming a joint venture. The local company will already know the market and have established distribution and supply chains, and a network of employees and consultants to help with expansion.

But being able to trust your joint venture partner is not always straightforward when other countries have different understandings of how contractually binding a contract really is. China, for example, is notorious for the breach of corporate contracts – and it takes years and pots of cash to right things through Chinese courts.

Wouldn’t it be easier to send over the people you already employ to manage the business in the other country, rather than employ a local?

Not necessarily. Smith said Unilever has relied on the value added by its “local leaders” – nationals with an understanding of their country’s work culture and market. He said investment and development in people is key to success in emerging economies.

Okay, then how do you avoid clashes with business partners and key employees whose culture is very different from yours?

PepsiCo’s Fry said it’s important to assess a partner on soft values – he said most people come unstuck on these rather than harder straight-forward issues such as whether your manufacturing processes and product quality standards are aligned.

So make sure you are on the same page when it comes to governance and regulation, to approaches to growth, attitudes to bribery, and so on. Lengthy interviews and extensive due diligence will help, as will hiring specialist recruiters.

Fry cautioned that he’d heard of UK companies that entered into a partnership only to find out that the local partner owned one of their suppliers or were affiliated with the government. Such conflicts of interest are much better rooted out before you have made any commitments.

Diageo’s Heginbottom also noted that “you have to make sure local managers are as focused on returns and growth [as UK management].”

How do you handle the need to bribe local officials?

The panel were unanimous in saying that your UK bribery policy must be adhered to across the world, as defined by the Bribery Act. You must find partners willing to stick to those rules.

How do you deal with local slip-ups?

Well, you could follow PepsiCo’s example. Fry said it “first and foremost operates under the laws of the local market. So we work with local government, local customers and agencies to address any issues.”

As far as possible it makes sense to deal with problems at a local level, rather than clogging up the international management processes with things that could be more simply and quickly resolved at local level.

So how do you manage things when your HQ is in London – and should you move your HQ?

“London is a global city at the height of the financial sector, and it works very well to be headquartered here,” said Heginbottom. “But you really need people who understand these countries’ markets, so day-to-day decision-making happens [in the country at local level]. HQ is here [in London]to make sure the business is delivering on growth.”

There is a nice lure for non-UK-nationals in turn in coming over to work at your offices in London. “It’s great to cross-pollinate like that,” said Heginbottom.

It’s also important to make sure that if you are operating at multinational level you allocate your resources across different countries in the most efficient way possible – this is one great advantage of having operations in different countries. You can base operations in the market that is strongest for that business function.

Smith cited Unilever’s example: its second-biggest brand centre is in Singapore, it has significant R&D and innovation centres in Shanghai, while India is of course very strong on the IT front.

How quickly will you turn a profit in an emerging economy?

Despite the fast growth of the emerging economy countries, entering emerging markets is by no means an overnight-millions solution. You need to invest in market research, and, as Fry said, “you need to be able to experiment”. That takes a pot of cash to play with.

Smith urged the importance of investing for the long-term. Unliver’s investments in India, he said, didn’t make money immediately.

Fry urged caution about competition from local competitors: “They will have a long history and be very established.”

How different does your approach
need to be in an emerging economy?

“The idea you can just export developed market products is just not going to work. You must research and tweak. Think of shampoos – hair types are different across different types of country. That’s just one example. You must tailor your advertising too,” said Smith.

He pointed out though that it makes sense to maintain best practise for back-end operations such as IT systems, even while product and brand offerings might change fairly dramatically.

Won’t local crooks nick your intellectual property?

It’s true that in certain countries intellectual property is treated with little regard. China is notorious for ripping off IP and producing copycat businesses and products – the fake Apple stores that were recently discovered in China being a case in point.

If you want more advice on this area, KPMG’s Matt Lewis wrote recently about doing business in China and how to make it work – the column is a must-read.

What are the other big risks when you enter an emerging economy?

“You need proper risk assessment and proper management, because it’s difficult to anticipate where the next crisis will come from,” said Heginbottom.

Should you enter one country or try your luck in several?

There’s a risk that you think that cracking one Asian country means you are able to crack them all. This would be a fatal error – there is huge disparity between neighbouring countries, and even, as Smith pointed out, within large countries themselves.

Fry warned against the tendency to view Asia as any kind of homogenous grouping of countries. He said that even among the 10 or so Asian countries he heads up financially for PepsiCo (excluding China), there are differences in culture, family, healthcare, lifestyle attitudes, not to mention economically and in terms of markets.

To tackle these differences, he recommended a goal of “building scale in the market rather than across the market”.

You also need to be wary of expanding overseas at the risk of your UK and European operations. “Don’t lose focus in your core markets when you go after emerging markets,” warned PepsiCo’s Fry.

Where are the hot new emerging economies after the BRIC countries?

“There is lots of news around China and India,” said Fry, “but there are huge opportunities outside those two – in South East Asia, the Philippines, Thailand”. He detailed the “young, consumer population” in these countries.

Smith said that “all the action in world growth is going to be in Asia and Africa”.

Africa was very hotly tipped by the panel throughout the talk – all believed it has huge potential. Ethiopia, South Africa and Nigeria got mentioned by name. Smith said that Unilever in Nigeria was one of the company’s fastest-growing businesses – “the population growth there is pretty astonishing”.

Turkey was another one to watch.

Other useful soundbites from the Economise CFO Summit

“It feels important to invest in Africa” – Diageo’s Heginbottom

“Have a very clear and constant strategy” – Unilever’s Smith

“Don’t just throw lots of money at emerging markets” – Diageo’s Heginbottom

Photo: George Eastman House

 




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