The High-Growth Markets Summit Driving business in the global economy September 20th–21st 2012 • Park Plaza Victoria, London SUMMARY REPORT www.highgrowthmarketssummit.com S P O N S O R E D B Y: THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT THE HIGH-GROWTH MARKETS SUMMIT DRIVING BUSINESS IN THE GLOBAL ECONOMY INTRODUCTION For many companies, high-growth markets represent their main source of global profit growth, and potentially the main source of revenue As developed economies stall and the investment risks of high-growth markets diminish, investors are increasingly looking further afield, to remoter regions within the BRIC (Brazil, Russia, India and China) economies, and to riskier frontier markets Their growing importance in the world economy means that businesses are being forced to rethink how they business in these markets, and how to restructure global operations that can no longer impose western business models on the emerging world These profound shifts in thinking underlay the wide-ranging discussions and debate at Economist Conferences’ 2012 High-Growth Markets Summit, with a focus on the following themes: • Why emerging economies have been better managed than developed markets; • The implications for business in China as it stands at an economic and political crossroads; • The relentless push of investors into tougher, “frontier” markets, especially in Africa; • How localised thinking underpins growth strategies, talent, innovation and risk management; and • The importance of innovation when servicing emerging middle class customers THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Developed markets versus emerging markets The sluggishness of western economies “2013 will be better than 2012 for the developed world, but not by much” said Robert Ward, the Economist Intelligence Unit’s Director of Global Forecasting He struck a particularly downcast note on the outlook for developed economies: the US economy appears to be faring slightly better than the Eurozone, and is seeing a very slow recovery A recession caused by trouble in the financial sector, however, typically takes years to recover from, as the experience of Japan shows US housing starts experienced an unprecedented collapse in 2007 And there is also the pending “fiscal cliff” for the US economy, before investors can be sure of sustainable recovery If the Eurozone achieves some stability, it could see 0.4% growth But Greece’s economy is set to contract by some 25% during this crisis, which arguably is the largest contraction of any developed economy in history Elsewhere, Ireland is struggling under very high debt, while in the UK, private sector debt is higher than in Spain and Portugal Eurozone collapse could usher in a depression Greece, Portugal and Italy will be the worst performing economies in the world in 2013 The performance of the Eurozone economies will be an important factor in how emerging markets fare in the coming years Paul Collier, professor of economics at the Centre for Study of African Economies, Oxford University, noted that Germany is the best run economy in Europe, because, historically, it was once the worst In other words, lessons were learnt about profligacy, which it would appear have still to be learnt by other Eurozone members “The euro had just two rules, one institution and upstanding members, but no critical mass of citizens who understand the institutions” Thus, there is need for leadership capacity to build that support he argued Indeed, it was these lessons that many leading emerging markets have learnt from their own difficult past, and that has served them well during the recent financial crisis One such economy is Turkey Responsible macro-economic management in Turkey Ali Babacan, Turkey’s deputy prime minister for economic and financial affairs, who opened the summit, argued that prudent management of his country’s debts and deficits during the good times had allowed Turkey to weather the bad times with relative ease The problem for the EU, he suggested, was that member governments had become inextricably involved in the crisis; governments may back troubled banks, but who, he asked, will back governments when they get into trouble? Fiscal and monetary expansion is simply not credible without a medium-term programme of structural adjustment The problem is also that enforcement mechanisms are not strong enough He warned that once one country exits the euro, others will follow Thus 2012 will be an important test year for the EU, as well as the US in its election year That said, he noted that there were signs of slowdown in big emerging markets too, as risk aversion increased But many emerging markets, not least China, still had huge fiscal and monetary space in which to react to any further crisis The risk was of countercyclical policies becoming too tight, too soon A more accommodative approach may be necessary THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Turkey, however, had dodged the worst of the developed world problems, largely as a result of a series of reforms implemented before the 2008-09 crisis These included: price stability, social security, banking and healthcare reform, and better management of public finances After the crisis, the government announced a three-year fiscal consolidation programme It saw private sector growth of over 9% in 2010, and 8.5% in 2011 Consumer spending, bank lending and investment was also strong, while government spending made no contribution to growth The OECD expects Turkey to have the OECD’s highest growth over a five year period The country also has an increasing working age population, and is encouraging families to have at least three children Mr Babacan pointed to rapid reductions in unemployment, especially youth unemployment The country had seen the greatest income redistribution in the OECD; the highest increases in household incomes at the lowest end (with no-one now living on less than $1 a day); and he noted that Turkey was no longer a recipient of foreign aid, indeed it was now a donor country Turkey wants Istanbul to become a financial centre, trading commodities, energy and gold, with a new capital markets law, and the establishment of financial courts The core of Turkey’s recent economic success has been fiscal discipline, hitting medium term deficit targets, and ensuring every Turkish bank became compliant with Basel III capital adequacy rules—all undertaken during the good economic times Household debt was low, the current account deficit peaked at 10% in 2011, and with credit growth slowing, is expected to be 7% in 2012 External demand is balancing slower domestic spending The relatively good performance compared with that in the EU has not undermined the importance of the EU to Turkey’s future The controversial question of EU membership negotiations is important because external pressure helps Turkish governments to implement rule of law and enhance democracy Fulfilling EU requirements represents the clearest evidence of the country’s democratic status But when Turkey joins the EU, or even what sort of EU it joins, is still open to debate But Turkey’s economic opportunities go beyond the EU Mr Babacan noted that Russia provided excellent business opportunities, especially in tourism (with some 3m Russians visiting Turkey annually) Exports to Syria, however, are suffering Any solution to Syria civil war must be within international law, though the absence of any UN consensus on the crisis means that Turkey is now working closely with the Arab League, he says “If there is no external anchor for Turkey, then we are afraid that momentum of the political reforms in the country will diminish… it is still our big political will to continue the process [of EU accession].” Ali Babacan, Deputy Prime Minister of Turkey Brazil’s economic achievements In a similar vein of responsible macro-economic management, Brazil’s minister of finance, Guido Mantega, outlined his government’s economic successes, forecasting annual GDP growth of 4-4.5% for the next few years, compared with below 3% growth in the OECD This forecast is based on solid foundations of effective economic policies, political stability, a dynamic external market, and strong demand for energy and commodities especially food THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Public debt has gradually declined to below 35% in 2012 which has allowed the government to pursue counter cyclical policies Consumer expansion in recent years has added some 50 million citizens to Brazil’s middle class This has helped boost retail growth to 7.5%, and create some 2.2m jobs, with unemployment falling to 5.3% Low interest rates (with scope for further reduction) has boosted investment and consumption, and lowered the currency He said that quantitative easing is ineffective if done in isolation Taxes were reduced on payroll, eliminating a 20% payroll tax Some 40 sectors saw tax reductions, worth R30bn ($15bn) Construction and shipbuilding are expanding Oil and gas group Petrobras is invested some $43bn last year, and there is a massive infrastructure programme to develop airports, rail and roads, including concessions for 10,000 km of railways, and 8,000 km of roads Moreover, much of the stimulus plan has still to be implemented These policies have helped to attract some $67bn of foreign direct investment (FDI) last year, more than flowed into the UK or India Government bonds yields at 2.7% are converging with US spreads Mr Mantega agreed that high commodity prices and credit expansion had helped, but private-sector credit was still only 50% of GDP, one third of levels in the US, and oil price are expected to remain high, ensuring the sector’s profitability over the medium term CHINA AT A CROSSROADS Slowing growth The biggest doubts regarding macro-economic performance was about China The country was said to be at a crossroads, with important political changes taking place in the leadership of the Communist party There is no underestimating the seismic changes happening to China’s place in the world, agreed panellists By 2020 it will be the largest economy (in PPP terms); indeed, five of the top 12 economies in the world will be in Asia But the country’s development model is outdated Its economic growth will slow to 7-8% this year, as success will depend on increasing domestic demand There are also problems with over-production, reflected in a so-called “Beijing bubble” This is the result of the extraordinary process of mega-urbanisation The country’s construction capacity could build a city the size of Rome every two weeks In addition, over the next decade, many cities will become “middle class”, in income per head terms Gerard Lyons, chief economist at Standard Chartered Bank, believed that China was concerned about inflation pressures, and export problems spreading to the domestic market China’s outgoing premier Wen Jiabao, in a recent speech, offered relatively little in the way of economic growth for the Chinese, who had perhaps become “spoilt” by recent high rates The economy, however, was not collapsing, just cooling, he reckoned, and said that there was lots of room for policy manoeuvre True, gloom seems to have spread, but this amounted to uncertainty not pessimism This is a middle income rapidly trying to become a high-income country, he said, and it will take more than a year plan to raise domestic spending that far “The big challenge is that China is a middle income country and wants to become a high income country and that is a very big task … The three most common words in the last decade were ‘made in China’; in the next decade it will be ‘bought by China’” Gerard Lyons, Standard Chartered Bank THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Eswar Prasad, professor of trade policy at Cornell University, focussed on the country’s internal and external imbalances A current account surplus of some 10% of GDP had created an external imbalance, though this was expected to be only 3% this year But investment led growth had created an internal imbalance, and this was still a problem Spending had been effective in the wake of the crisis, but it was now hard to get the policy mix right for the longer term Certainly, there was a need to retain some policy flexibility should the US, or Eurozone economies create more problems He noted that it was hard to talk about “good” or “not good” performance What rates should investors be expecting anyway, he asked A sustainable rate of 7-8% over the medium term is certainly not bad Mr Lyons added that it was also important for investors to understand what was behind these headline GDP numbers Regional differences are huge The authorities’ main policy hope was for wages to rise as the economy moved up the value chain and for investment and production to shift inland China has moved from “made in China” to “bought by China” But the country still needs better skills, which will take a lot of work and time And there are also demographic pressures to consider, such as low birth rates, ageing, and a gender imbalance Political uncertainty The economic outlook, however, rested upon certain political assumptions, and these outcomes were less clear The leadership struggles in the Communist party were hard for outsiders to read For example, it is still not know when the important party congress will be held, or who will get appointed But the assumption that incoming party leaders are not reformers is not necessarily correct The big economic issues are discussed openly by Chinese academics and think tanks The views of external organisations were also deemed important: it was important for the government that, for example, the 12th Five Year Plan obtained some kind of independent endorsement from the World Bank The government takes seriously comments and advice that calls for greater innovation in the economy Current policy plans are unlikely to change significantly, and reformers saw opportunities to influence policy It was noted that China’s Five Year Plans are not something that get casually abandoned, but get implemented with great effort If the plan calls for 7% growth, then there’s a good chance that this target will be met, said a delegate New provincial heads will also push to achieve regional targets One might even argue that the lack of democracy might help the government hit its growth targets Nevertheless, one cannot be complacent about reaching growth targets The economy is still run from the centre, and the financial system is repressed It was argued that the system works well for big banks and politicians, who are powerful, and resist radical change Implementation, even without the democracy, continues to pose problems There will be setbacks along the way It was noted also that the government wasn’t entirely unshackled by popular opinion Twitter is spreading, and even the President reads influential blogs China is much more transparent than it was, say, 15 years ago Tense international relations China’s foreign relations also present an important dimension to the growth story Alejandro Jara, deputy director general of the World Trade Organisation (WTO), said that China still had some way to go in its economic reforms in the world trading environment The country was the object of most trade complaints in the WTO, which is not entirely surprising – the more trade, the more disputes, he noted Much of the problem lies in implementation of rules China’s appetite for globalisation is strong, but it was approaching trade deals bilaterally and regionally This makes it hard to align a patchwork of such trade relations with WTO arrangements, and as such was suboptimal, but at least the country is moving in the right direction of freer trade THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT The issue of trade is increasingly tied up with relations with the US, especially the impact of the close US presidential race With US unemployment at 8%, and slow job creation, China will remain a potent issue during the election campaign and beyond US Republican presidential candidate, Mitt Romney, has suggested strongly that China was a “currency manipulator”, and should be confronted on this However, it is a hard case to make given China’s falling surpluses, and the appreciating Renminbi closer to fair value There doesn’t seem to be huge market pressure on the currency to appreciate Over the long term, it will continue to rise gradually over the next few years, simply as a result of growth differentials, anyway Financial inflows are probably a more important factor on its current rate Broadly speaking, the currency is more or less fairly valued “China’s currency is like a dog you take for a walk on a leash, sometimes the dog is ahead and sometimes it lags behind.” Alejandro Jara, WTO As well as trade relations, it was also said that the impact of international events, climate change or security issues should not be ignored Tensions in the South China seas could get out of control Politics could spill over to affect production For example, a threat to the supply of rare earth products could harm companies reliant on vertical supply chains in China Next wave opportunities: China’s cities, Vietnam and the Next 11 For investors wary of China’s rising costs or competitive market, they have the option of moving to inland cities, where “tier 3” or “tier 4” cities are relatively unserved and growing at around 13% They remain some 5-10 years behind eastern seaboard centres Consumer tastes don’t always derive from 1st tier cities, and there is some variations that are not always visible to western eyes, according to Stuart Ferguson of the China-Britain Business Council Less obvious advantages – such as a nearby specialised technical institute or certain natural resources—should also not be overlooked Patience is required when dealing with less experienced officials, and firms can be offered investment incentives that are at odds with central government policies, which can create legal problems later on, says Tracey Wut, a partner at law firm Baker McKenzie An alternative is to move to lower cost countries, such as Vietnam Truong Chi Trung, Vietnam’s vice-minister of finance, presented his country’s macro-economic achievements Average GDP growth over the past half-decade had been over 7%, although it had recently slowed to 5.5% FDI amounted to 18% of GDP Inflation had slowed from 14% to 6%, and the authorities expect to keep annual price rises in single digits Macro-economic stability, in the post-crisis period, was deemed a priority, achieved through fiscal discipline Spending has been boosted but the government deficit has fallen from 6.9% in 2008 to 4.9% today and will be 4.5% by 2015 A tax-friendly environment, regarding corporation, consumer and environmental taxes will help, as will export promotion efforts THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT The government wants to access international markets over the next decade Of some 10,000 state-owned enterprises, there are now only 1,300 in government control The government will retain stakes of 50% or 55% in some of these, with state control focussed on defence and public utilities Eventually, it envisages having just three or four very strong state enterprises FDI is seen as being very good for the economy by helping to restructure industries, so privatisation will involve foreign investors, he said As for state-owned commercial banks, the government will restructure these operations, before deciding their future The government also want to preserve a social safety net, providing the poorest some healthcare, income support, job training and credit for small businesses Vietnam was one of several next wave markets that were on investors’ radars, according to Katie Koch, managing director and senior strategist at Goldman Sachs The bank’s “Next 11” (or N11) emerging markets (comprising Mexico, Indonesia, Turkey, South Korea, Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines and Vietnam) had as a group outperformed any other category of frontier markets over any period in equities, she claimed Goldman’s was particularly bullish about the first four countries for, amongst several reasons, their strong demographic, health and taxation profiles She believed that these markets would help push global growth above 4% once conditions in developed economies improved There was some debate about what constituted a “frontier market” They were often characterised by high state interference, commodity reliance, poor governance, weak democracy and corruption They were also hard to access for portfolio investors The big corporations such as Unilever or Coca-Cola were the best vehicles for success in these markets Financial investors would also face poor liquidity and a risk of hubris that would misprice risk Charles Robertson, global chief economist at Renaissance Capital reckoned that frontier markets will rapidly follow a similar path of earlier reforming nations over the past centuries He noted how, for example, a simple “ease of doing business index” produced by the World Bank had, by ranking countries, spurred reforms to the business environment, and allowed these economies to access a huge global market As Julian Mayo of Charlemagne Capital, noted, it’s the rate of change rather than the current state of affairs to which investors should pay attention And nowhere is the impact of reforms more remarkable than on the African continent The great African renaissance It was the outlook for sub-Saharan Africa that captured greatest interest throughout the summit (accounting for almost half of the plenary sessions) Several perspectives on the continent’s future were presented, including that of the academic, the development agency, the foreign investor and local entrepreneurs Legacy, transition and potential Once regarded as “the hopeless continent” after two lost decades, Africa has enjoyed 10 good years Sub-Saharan Africa will be the fastest growing region in the world, according to EIU forecasts Wolfgang Fengler, lead economist at the World Bank, referred to the four “Y”s of demography, geography, policy and technology that have transformed much of the continent Demography includes rapid population growth, declining mortality, urbanisation (cities, as engines of growth, will account for over half of the population by 2023) Others had noted that the average age on the continent is only 18, compared with 32 in Asia and 39 in Europe, which will have major business implications Telephony has become much more prevalent in recent years, and not just for making voice calls The economic policy environment has also improved radically, which (with the exception of Zimbabwe) has produced good growth performances Paul Collier, economics professor at Oxford University, argued that our assumptions about risk and return in the three key THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT blocs, OECD, BRICS and frontier economies, had now changed It was a fantasy, he said, to expect 12% returns in the OECD, and that there is no advantage to be gained in the BRICs - everyone knows about them already Even frontier markets don’t provide very high returns, (in the mid teens or possibly 25%) The interesting story, he asserted, was about the risk side of the investor’s equation It is wrong to think that OECD is safe, as stagnant economies cannot be bailed out by growth And firm level risk is high too, with many so-called zombie firms But risk assessments of frontier economies are also misunderstood Zambia’s first sovereign bond was oversubscribed, offering only 5.6% - lower than bond yields in Italy or Spain Zambia is quite representative of African risk: a “soso” democracy, with natural resources” (in Zambia’s case, copper) One indication of Africa’s potential lies in the fact that its subsoil assets per square mile are $60,000, about one fifth of that in the OECD, which indicates huge amounts yet to be discovered, especially oil Growth in Africa is much safer With significant improvements in governance, and prudent macro-economic management, the continent was resilient in the global financial crisis Africa was “the dog that didn’t bark”, he noted With a strong commodities export sector, non-tradeable capital goods demand will be very high, especially in construction, which is growing faster than natural resources Others also noted that there are huge productivity gains to be had in consumer goods and retailing, commercial agriculture, and transport infrastructure Light manufacturing is already moving out of China to low wage Asia (such as Bangladesh) and will move to coastal Africa, not least because of its good access to both OECD and China China will not have the field to itself Its biggest advantage in Africa has been speed But Canada, Europe and Brazil are also becoming big on the continent Much land acquired by foreign powers simply as a geopolitical insurance policy in a crisis, was “a big stupid play”, Mr Collier said “Africa weathered the macroeconomic shocks of 2009 very resiliently because cumulatively they made little steps towards prudence… The dog that didn’t bark, internationally, was that Africa didn’t fall apart.” Paul Collier, Professor of Economics, Oxford University Simon Susman, non-executive chairman of Woolworths, believed that the legacy of colonialism persisted in many countries, and the more recent it is the harder it is for a country to move on But investors should look for those countries that have shrugged off their Marxism for market thinking, are less xenophobic, and accept a free press, he said Another good sign is the returning diaspora, which include many top people This is a continent where a modern, savvy consumer is emerging It points to an aspirational tipping point, a feeling that: “I want it and I can get it” amongst new consumers, said Mr Susman Investing and exit strategies Many new competitors are entering the market to capture this new consumer Zain Latif, founder of TLG capital, is already invested in Africa His focus is on healthcare, given the high proportion of disease in Africa, including cancer, AIDS and malaria He confirmed worries about the difficulty of accessing frontier markets through private investment portfolios While it’s always possible to find something to invest in, it’s very difficult to create shareholder value and exit, which is why the private equity structure doesn’t work well there Local banks lend at 30% because of inflation, making it hard to build a business within fixed timelines Many smaller funds entered in 2005-08 but managed only a couple of deals That said, it’s important to publicise success stories, so investors see beyond the traditional view of the region as an oil and gas opportunity – which can be hard for investors to get exposure to anyway—and see its burgeoning middle class, which is easier to access There is also a tendency to balk at political risks He mentioned Uganda which presents many good opportunities, but mainstream investors won’t go there (perhaps deterred by news stories of Joseph Kony and the LRA) and will wait until someone else shows that it can be done He noted that it can be hard to capture a market when people don’t have bank accounts Nevertheless, African consumers will spend on healthcare, housing and education So investors may see good returns in those sectors Even insurance can be profitable: Nigerians spend only US$0.05 per capita on policies, so there’s scope for life insurance, especially as premiums can be reinvested THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Diversification is essential, as at least one market will be in a crisis at any time It is also important to be country focussed, rather than vaguely referring to “Africa” It’s a hugely diverse continent in many ways One might also apply such distinctions to cities rather than countries, according to a panel on African cities Rapid urbanisation has made Lagos, Johannesburg, Nairobi, Kigali and others important business centres in their own right, and led to opportunities in services, retailing and property, as well as excellent opportunities to invest in infrastructure The future may lie in public-private partnerships to get key infrastructure built Despite the influx of the young into urban areas, skills shortages, and the lack of flight or rail connections between African cities was seen as among the biggest frustrations for investors The African entrepreneur Probably the biggest success story in Africa is Nigeria’s Aliko Dangote, founder, president and chief executive officer of the Dangote Group Titled Africa’s richest man, Aliko Dangote explained how to be an entrepreneur in one of the most promising markets in the world He began trading in 1978 in Nigeria A family loan which he repaid in three months allowed him to trade in sugar, rice and commodities during the 1980s, then textiles and banking His 13 factories produced a range of products, including flour and pasta, and also a joint venture with Coca-Cola Around 2005, the company attempted to work with cement giant Lafarge, but couldn’t agree terms, so he took a bold leap to compete, opening a cement factory in southern Nigeria It acquired over 40% of the market in two years The company quickly expanded across Africa, investing in and upgrading old processes, for example in Liberia, Sierra Leone, Cameroon, Gabon, Congo, Tanzania and elsewhere The company expects to produce 60m tonnes in sub-Saharan Africa over the next couple of years Cement now accounts for some 80% of Dangote’s business The group is moving into agriculture, encompassing vertical or backward integration including irrigation It is linking up with expert partners, in Asia to acquire refining businesses Faith in the African market is evidently stronger than ever, with huge investment plans, including some $7.5bn for petrochemicals projects There are significant resources of limestone, near Abuja to exploit The company expects returns on investments of at least 30% But there are challenges Lack of infrastructure is one The company plans to build west Africa’s first, 18-metre, deep-sea port, and will venture into logistics—it already owns 6,000 trucks—while lack of reliable power supplies means that the company needs to become a power producer too The company’s interest in steel and gas pipelines also require that adequate infrastructure, especially ports and roads, be in place Corruption is another problem Western governments are helping to clamp down on dishonest officials The company also sponsors seminars and advises governments on reducing corruption It is possible to business without being corrupt Good government relations are important, but you don’t need political connections to business There are one-stop shop investment bodies, for example, to help investors Governments can make life easier for big investors, especially when trying to resolve problems For example, investment in agriculture is deemed vital for the continent’s development, so many governments in the region will compulsorily purchase private land if seen to be in the public interest of developing agriculture A government crackdown on the Islamist terrorist group Boko Haram, which may have been responsible for a 3% drop in turnover, has helped suppress unrest A good name is also vital When Dangote proposed a $600m investment in Tanzania, for example, officials assumed it was a scam, until the investor’s reputation and its $2+bn net THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT worth became known, whereupon official doors opened and factories were set up Similarly, plans to list in London, are aimed at building the Dangote name globally The group already accounts for 26% of the Nigerian stock market, so London provides liquidity, and ensures better corporate governance, which will help sustain the firm’s reputation internationally The company’s balance sheet is already strong, with no bank debt and plenty of internally-generating cash Many of Mr Dangote’s observations were echoed by fellow entrepreneur, Zimbabwean Strive Masiyiwa, founder of Econet wireless The rapid growth in telephony has made Africa “the connected continent.” He believed that this extraordinary growth (where not long ago 70% of Zimbabweans had never even heard a telephone ring) could be replicated in other key sectors, especially energy and transport Political leaders are being advised to build infrastructure and develop skills, and as a result capital is flowing in Although many Chinese jobs are shifting to cheaper Vietnam and other lower cost Asian countries, potentially 100m jobs could go to Africa if its infrastructure improved It was considered vital that young Africans not see money only in mining and commodities, but elsewhere, and recognise the tremendous innovation outside of the primary resource markets As in any sector, you must have knowledge and competition to realise the opportunities It’s not just EU or US investors, but intra-regional investment from other African countries Currently, 22 African countries have annual average income per head of $1,000 per year, and around 400m people are deemed middle income Although the business environment in individual countries has improved markedly, it is a great challenge to business across more than one country Econet works in some 17 countries, but only three are French speaking Skills shortages are another barrier Disappointment often arises because investors think it’s just one country When thing go wrong, a common response is “we’re not doing Africa again.” Perhaps most importantly, the continent is expanding the “rule of law”, rather than the “rule of men”, said Mr Masiyiwa Private sector investors have often exacerbated this problem, in seeking an audience with ministers, rather than insisting on effective courts and police “The low hanging fruit has been consumed; the heavy lifting” [i.e creating effective courts and police] must now begin” he noted Bribery is another often-cited issue, but Mr Masiyiwa said that his company has never paid a bribe, even in Nigeria which bears a poor reputation for such practices If you expect to pay a bribe, then you will be quick to produce one; and it’s not necessary, he argues There are plenty of good, honest business people, but one has to have the right partners and the right information “People expect to have to pay a bribe, so are quick to produce one that they actually compound the situation If you know how to operate and recruit the right people, you don’t have to pay a bribe… We need to expand the rule of law, rather than the rule of men.” Strive Masiyiwa, Econet wireless In short, panellists agreed that Africa is not going backwards Although “crazy guys” can be found in any continent and oil exploitation could reinforce some of the old bad ways, the whole continent will go forward A stable Africa can be growing annually at around 6% THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Business strategy, innovation and the middle class consumer Localisation in markets, risk, talent and innovation Where to invest may depend as much on the location of the investor as the attractiveness of the target market That at least is an issue surrounded by common misconceptions, according to Pankaj Ghemawhat, professor global strategy at IESE Business School It is not enough simply to identify the fast growing economies in the world, and start to trade there He argues that bilateral trade is still determined by four fundamental attributes: a common language; a common border; membership of a trading bloc; and a former colonial relationship His research suggests that two countries sharing a language will double trade flows If they share all the above attributes, then trade will be some 16 times greater than between countries that not For example, US retail giant Walmart’s top foreign markets include: Mexico, Canada and the UK German carmaker BMW is rare in having over 20% of sales coming from each major region, but production, employment and management are very German Your strategy cannot be based on the fact that there are a lot of Indians and Chinese, but rather you must consider your common relationships with that market, he argues “If you go far from home believing that every place is just like home, the farther you get, the more trouble you are going to find yourself in….[However] differences once you identify them aren’t just a constraint to be adjusted to or overcome, but a huge source of value creation” Pankaj Ghemawat, IESE Business School To enter these markets requires a flexible state of mind Companies must think in terms of “Adaption, Aggregation and Arbitrage” Walmart faced restrictions in India which forced it to change its business strategy there by focussing on the supply chain That left the retailer well-placed to benefit now that India’s retail sector is being liberalised Adapting to different business environments can result in significant value creation, for example, shifting your company’s decision makers to Asia Now, with some $50bn-70bn of products sourced from China, Walmart can make cost savings of some 10% globally The issue of distance is crucial for Honeywell too, when thinking about how to scale up its business in emerging markets Shane Tedjerati, chief executive officer of global high growth regions at Honeywell, asked: “How you make a management system work, 10,000 miles away?” The answer for Honeywell was that 70% of decisions are made locally This policy allowed Honeywell to grow its China business tenfold over the last decade Headquarters needs to agree this autonomy at the outset, and stop constant monitoring of progress, especially as high-growth markets can experience severe downturns in the short-term, warned Anil Gupta of Maryland University It is essential to find and trust the right person, and leave them to it, says Mr Tedjerati who advised his local managers that it’s “better to ask forgiveness afterwards, than seek permission beforehand” “If you come with a command and control mentality, you’re dead” agrees Rajeev SinghMolares, executive vice-president of Alcatel Lucent’s Asia Pacific region “Get headquarters onside, but at a distance” he added Localising strategy was seen as equally important in risk management A company’s local “resilience” to risks can determine how well those risks can be mitigated This requires investors to “map out” and then “reach out” to stakeholders Risk management isn’t always about ensuring compliance with the regulatory environment, but part of a general trend towards localisation, in which your businesses is integrated into the local environment In this way, a company’s presence in a market becomes more nuanced, not just about products and profits You have to engage with locals, deeply, whatever business you are in, said Tim Mitchell, chief executive officer of FrontierMEDEX For example, covering the medical needs of say a malaria-prone community will be cost effective if it keeps your staff and surrounding businesses healthy and working If locals view a mining company that helps solve its most pressing THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT worries, then it will be easier for that company to handle future risks to its brand But it can be difficult for an investor to embed itself effectively in a community if the company is being managed from faraway headquarters The problem is often one of internal management, and a clash between “values-based” and “rules-based” or compliance-driven approaches to risk management One way of overcoming this tendency is to incorporate the idea of values-based risk into the early training of new recruits supported by cross-functional team discussion and data Getting the right balance between local and global was even more pertinent in the area of talent, leadership and innovation One common concern expressed was whether talented executives could rise beyond the limits of their own country operations, as the top leadership of many corporations were too often dominated by home country nationals According to Mark Schneider, chief executive officer of Fresenius, how does one achieve greater diversity at senior levels while maintaining the corporate identity across the organisation, especially in a rapid growth environment? Matt Barney, vicepresident of Infosys Leadership Institute, said that the company has had to focus on managing an employee’s soft skills, not simply his numbers, and to so without using a hard metric Other factors to consider in developing emerging market leaders included an executive’s sensitivity to cultural faux pas, and a general openness to continual learning and new experiences A good balance between local and global outlooks could also be achieved by giving managers a regional as opposed to a local or global role One example of sensitivities to be aware of was the adoption of “time-zone democracy”, according to Mr Schneider, that ensures all offices in any time zone are treated fairly when scheduling cross-border meetings Frugal innovation also typifies the localising challenges of global corporations, and could represent a major commercial threat for those companies who were unable to master, or at least understand, it For those in emerging markets, frugal innovation is not a management fad, but part of the mindset, “the DNA, of many Indians”, according to Jaideep Prabhu, director of the centre for India at the University of Cambridge It is a means by which billions of bottom- and middle-of-the-pyramid citizens are brought into the global economy Perhaps the most important factor supporting this process has been greater “connectivity” in mobile telephony said Ajay Mishra at Nokia Siemens Networks Research by Rita Gunther McGrath, professor at Colombia Business School, suggested that western companies find it particularly hard to achieve innovation-driven growth, but she advised that it is best done on small budgets Developing a consumer goods strategy “How you find the balance between mindlessly global and hopelessly local?” asked Sanjay Khosla, president of developing markets at Kraft Foods, whose “5-10-10 strategy” (5 cateogries, 10 brand, 10 markets) has been an important approach to product launches in emerging markets This involved giving a “blank cheque” to local executives to develop product ideas (albeit within a set framework) The response of staff, typically “starts with scepticism, then fear, and then produces good ideas.” For example, the company was planning to delist its Oreo biscuit brand just five years ago; but the strategy has helped it grow into a $1bn business A company has to be locally competitive, and that is achieved in part by investing in talent quicker than your rivals You need leaders who are locally connected and globally aware It’s important to consider who you are picking for your team (corporate people or new recruits) Diversity of cultures gives you a competitive advantage The “blank cheque” strategy doesn’t always work In Latin America, a hyper-talented team developed a nutrition product that failed twice, and was pulled But the team learned lessons from the episode, and the leader was promoted “How you find the balance between mindlessly global and hopelessly local?”” Sanjay Khosla, Kraft Foods THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT THE GREAT EMERGING MIDDLE CLASS CHALLENGE Identifying the emerging middle class The world’s emerging middle class presents a monumental opportunity for FMCG and luxury goods firms that are prepared adapt to the very different conditions discussed As well as a local perspective, a long-term view and a flexible business model are essential for success Emerging consumer markets could be worth $20trn by end of the decade, said Frank Braeken, executive vice-president of Unilever Africa Definitions of “middle class” of course vary: some define it as earning $2-20 per day Alexis Karklins-Marchay, co-leader of the emerging markets centre, Ernst & Young, refers to $2-13 at purchasing power parity (PPP), or even $10-100 day, which would include some 1.8bn people, a number that could triple in a decade or so This would also have a huge environmental impact which will force companies to develop new, innovative business models and products to cope For now, attention is focused on understanding the consumer Unilever has been targeting the middle classes for a century, and Mr Braeken noted that it’s easy to underestimate these consumers: they are often very demanding, and spoilt for choice One needs to have a “lean, mean, sharp strategy” he said This means getting to the consumer before he’s middle income, with cheaper products “Waiting for him to come to you is probably a losing strategy” “The easiest way to capture that emerging middle income consumer is to be there when he’s not yet middle income … you must give him cheaper products, reach down, reach up and reach wide Waiting for him to come to you is probably a losing strategy.” Frank Braeken, Unilever Mr Karklins-Marchay says that the old view of emerging market business, ‘Shanghai, Mumbai, Dubai or goodbye’ no longer applies The number one challenge is affordability, then physical reach You need to be creative, such as using Shakti women to distribute your products in rural areas “We used to consider the emerging markets as: ‘Shanghai, Mumbai, Dubai or goodbye’… Today there are so many markets of interest.”” Alexis Karklins-Marchay, Ernst & Young For Richard Monturo, vice president of marketing at Volvo Car Corporation, the challenges are at the upper end of the consumer spectrum He agreed that it is necessary to focus on class mobility The average age of its Chinese customers is 37 years old, 10 years younger than in the West This means targeting consumers in their mid-20s One can learn a lot from the Chinese parent company about entry-level buyers Focus groups reveal a greater consumer awareness of features, because buying a car is a relatively big expenditure for them But while we are seeing a change in economic terms, cultural values may still be old and markedly different from those in the West One has to speak directly to Chinese or Indian cultures One cannot expect them to adopt western values “We must take off our western glasses” said Mr Monturo THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Adapting your product offer Therefore, Volvo dealerships require high service to be bundled into the product Customers negotiate aggressively, so the company must recruit good sales people The service side is very tough, and good people will be poachable Similarly, Unilever’s service is about giving more In Brazil, if you buy a Hellman’s product, a recipe will be printed on your receipt In China, customers can engage in conversation with in-store “beauty advisers” about skin care products, a service which for many is “as important as the product” But there’s also great variety Indians spend much less on beauty products than Brazilians do, so your offer must also vary depending on the region Consumers don’t necessarily want local brands, but “relevant” brands There isn’t necessarily a “local versus global” dilemma Most consumers don’t even know what is local or not However, “heritage” does influence the consumer, and local firms are usually better able than foreigners to access deeper consumer insights For example, there are many reasons why a consumer might go for a locallymade rather than an imported product With cars, some want the “otherness” of a car coming from elsewhere; others want the easier access through a local dealership Or it might just come down to local taxes Brazil has a 30% luxury tax which has forced car companies to produce inside the country It’s a market in flux, and we will see many more brands being developed and tested in emerging markets, and then brought back to developed markets Firms “must move from: ‘think globally act locally’ to ‘think locally act globally’; and scale up once you have the insights”, says Mr Braeken The Latin American consumer There are few places where the new middle class spending boom is more extraordinary than in Brazil Luiz Eduardo Melin, the managing director of BNDES, Brazil’s state development bank, explained the context for the country’s consumer explosion Family debt did not as expected constrain consumption – the problem was the supply of credit, not the demand, and credit continues to increase The labour market is something of a “a seller’s market”, so rising real wages has created huge spending potential which is spreading regionally as well as socially The government’s own massive spending plans of some $1trn over the next three years, on infrastructure and housing, coupled with private investment in the energy sector will feed into more consumer spending Randy Millian, president of Latin America and the Caribbean, for drinks group Diageo, said that the company is expanding by some 15% annually in the region, by growing its product portfolio, innovation and acquisitions Brasil Foods, which produces turkey, hams, sausage etc said it has sustained average annual growth of 7-8% for the past 15 years, focusing on ready-to-eat convenience, and appealing to the wide variety of tastes across the country, whether this means stronger flavours or less salty margarines Consumption is still based in metropolitan areas, but the company wants to expand to non-urban populations, and get to ports and harbours for export Traffic congestion and infrastructure is a persistent problem, especially for the “last mile” of distribution Products have to be moved by expensive truck Diageo faces similar issues, but of course they ship their bottles one way only, so faces only half the difficulty Diageo see an attractive consumer market elsewhere in Latin America too, including Mexico, Peru, Colombia, Dominican Republic, Venezuela The big concern is a shortage of talent, especially finding staff with an ability to take risks and deal with unknowns Colombia is doing very well with the help of trade agreements, and has strong domestic food companies, making it “occupied territory” for Brasil Foods, which will have to acquire an existing operation there THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Brand building was also seen as key in anticipation of middle class demand Echoing fellow panellists, Mr Millian advised: “Make sure you build brands, because the middle class is aspirational and will eventually get to you” The internet is very important for brand building, though this can be hampered by low speed internet connections There are many competing brands from the emerging world, which can be acquired to access domestic markets One has to “look for the little jewels and then develop them” says Mr Millian In some cases, where locals not trust their own brands, one can import them, such as in food and beverages Kraft’s Sanjay Khosla captured much of the discussion about emerging consumer strategy, saying that while mistakes inevitably are made, companies should invest in people and brands, fix problems before scaling up a business, keep faith, stay positive, celebrate success, and learn from failures CONCLUSION Finally, Daniel Franklin, the chair of the summit, summed up the challenges of emerging markets in Olympian terms: “faster, higher, stronger.” The transition from the old global economy to the new economy has been faster than anyone imagined The bar for success is being set ever higher, now that everyone seems to be drawn to riskier frontier markets; and companies need to be stronger, by understanding how to operate in these markets and how to apply new insights in all sorts of ways Economist Conferences Economist Conferences is a part of The Economist Group, publisher of The Economist newspaper Sharing The Economist’s commitment to informed, impartial and independent debate, we are recognised the world over as a leading provider of highly interactive meetings—including industry conferences, private gatherings and government roundtables—for senior executives seeking new insights into important strategic issues Economist Conferences 26 Red Lion Square London WC1R 4HQ Telephone +44 (0) 207 576 8000 Fax +44 (0) 207 576 8472 www.economistconferences.co.uk Copyright © 2012 The Economist Group All rights reserved Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of The Economist Group Whilst every effort has been taken to verify the accuracy of information presented at this conference, neither The Economist Group nor its affiliates can accept any responsibility or liability for reliance by any person on this information [...]... exploitation could reinforce some of the old bad ways, the whole continent will go forward A stable Africa can be growing annually at around 6% THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Business strategy, innovation and the middle class consumer Localisation in markets, risk, talent and innovation Where to invest may depend as much on the location of the investor as the attractiveness of the target... directly to Chinese or Indian cultures One cannot expect them to adopt western values “We must take off our western glasses” said Mr Monturo THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Adapting your product offer Therefore, Volvo dealerships require high service to be bundled into the product Customers negotiate aggressively, so the company must recruit good sales people The service side is very... malaria-prone community will be cost effective if it keeps your staff and surrounding businesses healthy and working If locals view a mining company that helps solve its most pressing THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT worries, then it will be easier for that company to handle future risks to its brand But it can be difficult for an investor to embed itself effectively in a community if the... the team learned lessons from the episode, and the leader was promoted “How do you find the balance between mindlessly global and hopelessly local?”” Sanjay Khosla, Kraft Foods THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT THE GREAT EMERGING MIDDLE CLASS CHALLENGE Identifying the emerging middle class The world’s emerging middle class presents a monumental opportunity for FMCG and luxury goods...THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT worth became known, whereupon official doors opened and factories were set up Similarly, plans to list in London, are aimed at building the Dangote name globally The group already... with the help of trade agreements, and has strong domestic food companies, making it “occupied territory” for Brasil Foods, which will have to acquire an existing operation there THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Brand building was also seen as key in anticipation of middle class demand Echoing fellow panellists, Mr Millian advised: “Make sure you build brands, because the middle class... of the summit, summed up the challenges of emerging markets in Olympian terms: “faster, higher, stronger.” The transition from the old global economy to the new economy has been faster than anyone imagined The bar for success is being set ever higher, now that everyone seems to be drawn to riskier frontier markets; and companies need to be stronger, by understanding how to operate in these markets. .. innovation-driven growth, but she advised that it is best done on small budgets Developing a consumer goods strategy “How do you find the balance between mindlessly global and hopelessly local?” asked Sanjay Khosla, president of developing markets at Kraft Foods, whose “5-10-10 strategy” (5 cateogries, 10 brand, 10 markets) has been an important approach to product launches in emerging markets This involved... China, Walmart can make cost savings of some 10% globally The issue of distance is crucial for Honeywell too, when thinking about how to scale up its business in emerging markets Shane Tedjerati, chief executive officer of global high growth regions at Honeywell, asked: “How do you make a management system work, 10,000 miles away?” The answer for Honeywell was that 70% of decisions are made locally This... policy allowed Honeywell to grow its China business tenfold over the last decade Headquarters needs to agree this autonomy at the outset, and stop constant monitoring of progress, especially as high- growth markets can experience severe downturns in the short-term, warned Anil Gupta of Maryland University It is essential to find and trust the right person, and leave them to it, says Mr Tedjerati who ...THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT THE HIGH- GROWTH MARKETS SUMMIT DRIVING BUSINESS IN THE GLOBAL ECONOMY INTRODUCTION For many companies, high- growth markets represent... class customers THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Developed markets versus emerging markets The sluggishness of western economies “2013 will be better than 2012 for the developed... for energy and commodities especially food THE HIGH- GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT Public debt has gradually declined to below 35% in 2012 which has allowed the government to pursue