Russian Roulette

When your standard marching orders are to grow the company's emerging market business, what's to be done with sudden political crises like those we've seen in Russia? Since Vladimir Putin decided to help himself to part of Ukraine, the Russian economy has seen $70 billion in capital flight (slightly more than all of 2013), leading to stagnant growth and fears of inflation. Investors and business managers are less concerned with a few Black Sea ports than they are with precedents like annexing ethnic enclaves and shutting off oil spigots to Ukraine or Europe.

Seasoned emerging-market veterans will see the rising tension between Russia and the West for what it is - part of the cost of doing business in a market with inherent political risks. As the Russian oligarchy and its pugnacious leader engage in riskier behavior, executives in tech, pharma, and a number of other industries might decide to make their big moves elsewhere. However, it's worth noting that business growth in Russia (and other politically risky emerging markets) has been fairly robust for almost 20 years, and though the oil-and-gas gravy train may be slowing, most of the other engines are on track: the middle class is growing, demand for consumer products and services is soaring, and there's room for growth in many industries.

With the exception of a few industries, business leaders who worry about getting in bed with robber barons have a few mitigating factors to consider. Technology has a democratizing effect, education and healthcare help the masses, financial services spread the wealth, and agriculture puts food on the table. By focusing on trends, not on the crisis, companies can identify long-term opportunities that merit the complex navigation through political storms. There will be opportunities in Russia after Crimea, in India after the elections, in Brazil when the debt bubble bursts. When choosing the "wait and see" approach, don't stop asking the man on the street what he's going to do with all that hard-earned cash when the dust settles.

Challenges Chinese and Russian firms face with global expansion...

by Karen Coppock
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Moscow’s SKOLKOVO Institute for Emerging Market Studies (SIEMS), a think tank that focuses on emerging markets with offices in Beijing, Moscow and India, recently released a report on Operational Challenges Facing Emerging Multinationals from Russia and China. Is definitely worth reading, but for those pressed for time, below is a short summary.

SKOLKOVO analyzed 92 Chinese and 55 Russian multinational firms and identified six main obstacles - and methods of overcoming them - to international expansion (in order of importance):

Challenge #1: Low brand recognition

• potential solution: build your brand, focus on consumers in less-loyal, more price-sensitive emerging markets
• examples (not from the report): from Bharti's (India) interest in MTN (Africa), Telmex/America Movil's (Mexico) expansion across Latin America and Huawei's (China) success in emerging markets across the globe are all examples of emerging-market firms' exploration of other emerging markets. With different perceptions of risk and cost structures than their developed-world peers, these firms may also be better positioned for success in these markets as well.
  

Challenge #2: Talent shortage

• potential solution: hire locals
• example: "VympelCom has made it a policy to gradually involve local talent in management, replacing Russian expatriates – despite the fact that successful local staffs often see the job in a multinational as a chance to leave the country. Such policies are not very characteristic of young multinationals."

Challenge #3: Unsatisfactory knowledge transfer

• potential solution: make tactic knowledge explicit and foster organizational learning
  
• example: "According to Erik Eberhardson, who had led GAZ through the integration of LDV, two of his main takeaways from the LDV integration were that “one must ‘mix’ people more actively” and that “one should pay more attention to internal communication.”

Challenge #4: Inappropriate organizational structure

• potential solution: Start with scale in mind and empower local subsidiaries while maintaining central control
• example: "managers in remote subsidiaries should have enough decision-making power to adapt to the various environments, and be accountable for results. At the same time, the corporate center should have sufficient authority to harness potential synergies, failing of which would not create additional value."

Challenge #5: Political and regulatory risks

• potential solution: be informed and prepared...the authors offer little guidance in this area aside from saying to rely on local connections, but not too heavily on one group as they may lose favor as government administrations and preferences shift..
  

Challenge #6: Complex labor costs / relations

• potential solution: Tailor HR strategies to local, cultural norms

IKEA's latest difficulties illustrate Russia's corruption issue

by Brendan Smith

Two weeks ago, we posted about Russia's economic travails and the perception of it as a tough place to do business, and we included a link to an article about Swedish furniture giant IKEA's recent decision several months back to halt new investment in the country until the country's massive corruption problem improves. One of the biggest obstacles cited by the retailer and other foreign investors is the demand for bribes by Russian officials in order to secure approval for hookups to utilities such as electricity and gas.

The plot thickened late last week, when IKEA revealed to the New York Times that it had recently lost a court decision in Russia after it canceled the contract of the company providing generator rentals (IKEA's way of avoiding bribes was to install its own generators). It did this after learning that the executive managing the generator rental company relationship had taken kickbacks to inflate the price of the generators, costing IKEA $196 million over two years.

IKEA thought it could recoup some of the lost money in Russian civil court, but instead the court ruled in the rental company's favor and ordered IKEA to pay it $7.1 million, to be held in escrow until an appeal was heard. But a lower court ordered the judgment money be withdrawn from IKEA's Citibank account. IKEA officials and lawyers suspect corruption in the courts too, as opposing lawyers seemed to know the decision in advance.

IKEA released details of the case in order to use publicity to embarrass Russian authorities into action. But graft seems to be so pervasive in Russia (the country ranked 147th out of 180 in Transparency International's rankings of clean government) that the countries authorities may be incapable of embarrassment. The losers (other than IKEA) in all of this? The average Russian, who pays higher prices and gets less choice when companies, both foreign and domestic, have to pay a bribe in order to do business.

BRIC, BIC or Alphabet Soup?

U.S. Vice President Joe Biden, well-known for his tendency to speak his mind, caused a political row last month when he suggested that Russia's best days were behind her. The furor over his comments put a spotlight on Russia's anemic economy, overdependence on commodities and its worrying demographic trends. The perception of Russia as the weakest member of the BRIC countries was reinforced when the Russian government announced recently that foreign investment in the country plummeted by 45% in the first half of 2009. Output is still falling, and the Russian economy is expected to contract 6.8% this year, a much worse result than the 2.8% decline in the U.S. and the surprisingly robust figures being posted by its 'BRIC' peers: Brazil, India and China.

The term 'BRIC' was coined by Goldman Sachs economist Jim O'Neill when he argued that these four largest emerging economies could become the dominant economic powers of the world by the middle of this century, eclipsing the economies of the Group of 7 industrialized democracies. The four nations have large populations and dominant positions in manufacturing (China), services (India) and raw materials (Brazil and Russia). Yet each of them has its problems. Corruption, persistent poverty and a groaning infrastructure are issues that afflict each of the BRIC nations to some extent. These are all obstacles that are worth overcoming, but only if there is a potential reward in the form of access to a vibrant, growing economy and consumer market. The difficulty of doing business in Russia, along with the more recent decline in economic opportunities has understandably caused many companies to prioritize the other 'BRIC' countries in their strategic growth plans.

Categorizations, such as the 'BRIC' countries, can be useful indicators of market size and economic power, but such designations cannot replace thorough due diligence regarding barriers to entry and other areas of business risk. The 'BRIC' club also eliminates some very interesting and sizable markets such as Mexico which trails close behind India in terms of GDP and provides nearly 10 times India's average per capita income. Firms would do well to consider a wide range of countries for revenue growth and determine a nation’s relevance to their own business strategies on a case-by-case basis.

Is the Rest of the World Ready for a Unified BRIC?

Leaders of the BRIC countries (Brazil, Russia, India and China) met last week in Russia for the first-ever summit between the leaders of these emerging-market giants. While trade between the four nations is not large enough to warrant a new trade bloc, they do share common interests in global trade that they might address more effectively as a group. The reported topic of this first set of meetings included a move to decrease the role of the US dollar in global commerce.

The combined strength of these economies is considerable. Already, they represent 15% of global GDP and 43% of the world's population. They also hold 40% of the world's gold and hard currency reserves. More importantly, these countries' annual GDP growth rates are forecasted to be double that of developed countries over the next five years. China is expected to overtake the US soon as the number-one consumer in the world, while India's rural market is an example of resilience and growth in the face of the global economic crisis. It is no wonder that global retailers are placing big bets in emerging markets, with much focus on the BRIC countries. The growing maturity of these economies is also hastening the emergence of a host of homegrown companies able to compete outside their home market.

For global businesses, the BRIC countries are an essential factor - as a group and individually - when setting growth strategies. Moreover, the large firms based in these countries are quickly becoming formidable competitors, as they grab up land and businesses in smaller emerging-market countries. Multinational corporations in developed nations would do well to broaden their BRIC country analyses to include the market opportunity and emerging competition in these geographies.

Emerging Markets Definition and World Market Groups

Apparently, Michael Dell and Vladimir Putin don’t agree on the definition of a developing country. In a surprising exchange at the World Economic Forum in Davos last week, Mr. Dell asked the Russian prime minister how the IT sector could help Russia make the best use of its talent and technology. Putin replied that Russia doesn’t need any help and is a technologically advanced country with strong science and math programs and a robust software industry.

Putin may see Russia as highly advanced, but technology executives like Dell, who closely monitor the country’s market potential, view it as firmly seated among the ranks of other developing countries. Russia’s per capita gross national income (GNI) rests at $14,400, similar to Argentina, Mexico and Libya, and, like other developing countries, it still suffers from neglected infrastructure, rising inflation and food costs, and a large disparity of wealth between urban and rural residents. Though the debate over emerging market definitions does not generally happen on such a big stage, it is commonly discussed by analysts and business managers, since there is no single accepted definition. For business leaders like Dell, the classification of individual countries can have a profound effect on investment decisions and business strategies. Depending on the product or service offering, target customer segment, or geographic focus, these analyses may include data on infrastructure availability, distribution of wealth, technology diffusion, education levels, business climate, and governance, to name a few.

Emerging market definitions that rely solely on broad economic indicators provide a useful high-level view of the market opportunity for technology companies (see Vital Wave Consulting’s Emerging Markets Definition and World Market Groups). However, the actual market for certain products and services is often determined by a range of non-traditional, hard-to-find data. While most technology companies are focusing heavily on Brazil, Russia, India and China (BRIC), there may be an opportunity for medium-sized enterprises (or product groups within larger corporations) to gain a competitive advantage in strategic, second-tier emerging markets which, if measured appropriately, may have comparably-sized addressable markets.

India’s Broadband Drop Surprises Analysts

This week’s nugget was unearthed in an Economic Times article that claimed, to everyone’s surprise, India’s fixed broadband subscription rates fell last quarter. The total number of Internet connections dropped to 9.22 million between April and June from 9.27 million the previous quarter. The article and related blogs speculate on the possible causes for this drop: unstable connections, poor service and bandwidth constraints. It may be that Indians are turning to their mobile devices to access the web. According to the Economic Times, 38 million people, or more than a fifth of India's 200 million-plus mobile subscribers, access the web via their handsets.

This drop in broadband Internet connections is small for a country the size of India. However, the lack of growth and the strength of mobile Internet access are notable. Fixed broadband availability and usage rates have often been used as an input for measuring a country’s technical maturity. The increasing sophistication of mobile devices may change that. Historical growth trends would have predicted that India’s broadband rates would continue to increase and certainly not slow, let alone fall. This demonstrates a weakness in historical-based approaches and confirms that new markets require new methods of evaluation. Applying developed-country adoption trends to developing-country markets leads business managers to design inappropriate strategies in emerging markets.

Technology is being adopted faster in emerging markets than in mature economies. Moreover, adoption and usage patterns may differ considerably. Consumer cash flow constraints, the stability and availability of a local infrastructure, technology awareness, and access to various technology devices all impact adoption curves. Therefore, historical growth trends are only one input among many to credibly forecast emerging-market growth. In a market like India, these factors can help project dramatic shifts in technology usage patterns. The increasing use of mobile phones for Internet access is yet another sign that IT and telecommunications strategies can no longer be considered in isolation, especially in emerging markets. Both industries will be competing more and more for access to the limited disposable income of developing-country customers.

Also in the news:

• Who pays for low-cost laptops?
• Intel readies CPU for cheap computers
• Eee PC scores one million-unit Russia deal

Think Global, Partner Local

March 14, 2007

Think Global, Partner Local

Professor Pankaj Ghemawat of Harvard Business School poked a hole in the world-is-flat version of globalization in the current edition of Foreign Policy magazine. Ghemawat points out that “more than 90 percent of all phone calls, Web traffic, and investment is local,” and that most Web users chat with local friends or e-mail family rather than connect with someone overseas. “We’re more wired, but no more global.”

The preference for local, relevant content may account for the struggles US-based companies like Google, Yahoo, and eBay have faced in transplanting their success to emerging markets like Russia and China.

To win these markets, multinational tech companies are wisely experimenting with different business models – partnering with local competitors, surrendering overseas operations to local players, or signing up proven consumer champs like Pepsi and Procter and Gamble to find new advertising revenues.

There is a clear opportunity for SMB’s in developing countries to partner with multinational search and e-commerce companies to collect and deliver locally relevant content. Soon, it will be possible to identify a user’s location as soon as she logs on. The company with the strongest roster of local content providers will achieve the most business growth in that environment.

Also in the news this week

• MobiTV sees demand for service in developing countries
• Apple developing flash-memory notebooks – more rugged, less expensive could give Apple an emerging-market play
• Microsoft moves into enterprise VoIP – enabling more cost-effective operations in MNCs with overseas offices