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Fwd: Business: A change in gear - FT (Please Read)
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Eric Schwerin
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Hunter Biden
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I sent this article and comments to our senior team this morning. Michael > > I commend this article for a close read. I believe it provides some > guidance on what hedge funds, portfolio investors and private equity > firms will be looking for from firms like ours. Information on > political risk and perhaps at times on the companies structure and > even in some cases their technical depth. It also provides an > indication that we have recognized that SWF will be critical > investors since they have large pools of capital and are comfortable > with the complexity of cross border transactions. > > It raises by implications that a company with our products may be > called upon by Brazilian, Indian, South African companies to assess > US, European and other developed countries political risk, corporate > culture and some technical analysis. > > MPA > > PS the outline of a business plan. > > > Business: A change in gear > By Stefan Wagstyl > Published: May 11 2010 21:47 | Last updated: May 11 2010 21:47 > > > Pulling rank: a London cab with a Chinese makeover. The vehicles, > such as this one seen in Tiananmen Square, are produced by > indigenous carmaker Geely and the British company in which it owns a > stake > > EDITOR’S CHOICE > Europe agrees rescue package- May-10 > > Editorial: Markets struck by jitters - May-07 > > Outside Edge: On the money in the 2.45pm crash - May-07 > > Basel regulators weigh cost of reform - May-03 > > Opinion: Plan B for the debt crisis - Apr-29 > > Opinion: Time to press on with bank reform - Apr-21 > > As chief executives emerge from recession they are seeing some > unfamiliar names scurrying around the global corporate landscape. > > In Europe, Geely, the Chinese carmaker, is finalising a $1.8bn > (€1.4bn, £1.2bn) acquisition of Volvo, the Swedish manufacturer. > In Africa, India’s Bharti Airtel is set to become the world’s > fifth-largest mobile phone operator through the $10.7bn purchase of > the regional assets of Zain, the Kuwaiti telecommunications group. > In the US, Reliance Industries, India’s biggest private sector > company, is completing a $1.7bn joint venture with Atlas Energy > after narrowly failing in Europe with a $14.5bn bid for > LyondellBasell, a Dutch chemicals group. > > Meanwhile, after last year’s slump, exports from emerging economies > are recovering at break-neck speed, rising last month in China, for > example, by 30 per cent. > > Companies from emerging economies are back on the move. They “have > come out of the crisis better than developed world corporates”, > says Chris Hemmings of the PwC consultancy. > > These groups are climbing up the value chain with new products, > services and brands, ranging from high-technology Chinese > electronics to Indian cars and Brazilian financial services. As > Edward Tse of the Booz consultancy writes in a recently published > book: “China is no longer exclusively a source of low-cost > manufacturing. It is realising its potential to be far more: a > source of global competitors in every aspect of business on the > global stage.” > > > The same applies to India and, to a lesser extent, Latin America. > For global corporates, this is an even bigger shift than the > emergence of Japanese groups as international investors 25 years > ago. The new challengers are moving faster and more aggressively > than did the cautious Japanese. > > The new multinationals are coming from countries more open to > foreign investment than Japan was in the 1980s. Hundreds of > international companies are already firmly established in markets > such as China, India and Brazil; developed and emerging world > companies are competing head on across a range of industries – and > co-operating extensively through joint ventures. But the rivalry is > becoming more intense, embracing the developed as well as the > emerging world. > > For portfolio investors, too, the game is changing. Once investing > in emerging markets mainly meant backing a particular economy’s > growth potential or its capacity to export commodities. No longer. > Now it means investing in businesses already ranked among the > world’s largest in their industries, such as SAB Miller, the South > African brewer; Cemex, the Mexican cement group; or Huawei, China’s > biggest telecommunications network equipment group. It means > investing in new technologies, brands and ways of doing business. > > Competing with emerging market companies is nothing new for > developed world multinationals. While they faltered in the worst > recession since the 1930s, they are recovering rapidly. The number > of emerging markets companies in theFinancial Times Global 500 may > have nearly doubled from pre-crisis levels of 68 in March 2007 to > 119 two months ago – but the majority are still from the developed > world. > > CASES IN POINT > Asian groups making inroads at home and abroad > Huawei > With its library and conference rooms grouped around tropical plant- > filled patios, the Chinese telecommunications equipment maker’s > airy, Norman Foster-designed headquarters in the southern city of > Shenzhen could compete with those of any global technology company. > This is appropriate for a group that is now the world’s second- > largest telecoms gear maker, with $21.8bn revenues and a 14.2 per > cent global market share in 2009, behind Ericsson. > Unlike banks, automakers and other Chinese companies muscling into > global top ranks on the back of the country’s 1.3bn population, it > owes its rise mainly to overseas success. “They have grown despite > their home market, not because of it,” says Duncan Clark of the BDA > telecoms consultancy in Beijing. > With fat credit lines from state banks allowing it to offer generous > financing to telecoms operators, Huawei has been highly successful > in emerging markets besides its own, and is also making inroads into > developed markets. > Competitors attribute its growing market share to lower prices but > many customers acknowledge that it offers greater flexibility. Where > some equipment makers have been marketing complete systems, Huawei > is willing to customise according to operators’ demands. > Increasingly, however, it is meeting hurdles. Despite years of > effort, it has yet to land a big order in America. Since Ren > Zhengfei, the secretive founder and chief executive, is a former > People’s Liberation Army officer, the US continues to have security > concerns over Huawei equipment. > With reassurances that it is owned by staff rather than the state or > military failing to convince, it has begun a campaign to win greater > trust. Huawei has put a managing director in Washington and is > making efforts to engage the media. Kathrin Hille > > Air Asia > Once a failing state-owned Malaysian airline with just two aircraft, > AirAsia is now one of the few indigenous companies in emerging south- > east Asia with a brand that resonates across the region. > Tony Fernandes, chief executive, bought it in 2001 with the aim of > making it the home airline of the 10-country Association of South > East Asian Nations, an economic and trade grouping with 580m > consumers and a combined economy bigger than India’s. > Nine years after Mr Fernandes bought it for a token M$1 plus M$40m > debt, AirAsia boasts more than 90 aircraft, joint-ventures in > Thailand, Indonesia and Vietnam, and a network that extends beyond > Asean to China, Sri Lanka, Bangladesh and India. > AirAsia X, a long-haul affiliate, flies to the UK and Australia, as > well more distant parts of India and China, bringing the group into > direct competition with developed country airlines such as British > Airways, Qantas, Singapore Airlines and Virgin. > Starting with just $250,000 in cash, Mr Fernandes relaunched AirAsia > as the region’s first real low-cost airline, copying the no-frills > model pioneered by Southwest Airlines of the US and Ryanair of > Ireland. > The company has grown rapidly because of a rigorous focus on keeping > down costs through lean staffing, multi-tasking, and high aircraft > utilisation rates, boosted by low levels of congestion at many Asian > airports. As a result, its costs are widely regarded to be lower > than those of Ryanair, regarded for many years as the global leader > in cost control. > Chris Tarry, a UK-based aviation analyst, says AirAsia is probably > one of only three budget airlines in the world making sustainable > profits. > “The model for the future,” says Mr Fernandes, is for AirAsia > “to go to the Middle East, to Korea, and [more comprehensively to] > China and India”. Kevin Brown > > Western, Japanese and South Korean multinationals retain huge > reserves of talent, technology and capital. Many have been in > emerging markets for decades, including Unilever, the Anglo-Dutch > consumer products group; General Electric, the US conglomerate; and > Siemens, the German engineering group. Others have joined more > recently, among them Microsoft, the US software giant, which has > established its biggest development centre outside the US in > Beijing; and Cisco Systems, the computer network group, which has > set up “a second headquarters”, Cisco East, in Bangalore, India. > > Davin Chor of the Singapore Management University argues against > over-generalising from the weaknesses of a few high-profile American > companies, such as the carmakers. “One shouldn’t be too bearish > about American companies going forward.” > > The same applies to European companies. The biggest cross-border > acquisition this year so far is the planned $35.5bn purchase by > British insurer Prudential of AIA, the Asian business of US group > AIG – a more conventional case of a developed world company moving > into emerging markets. > > Equally, some emerging market companies were battered during the > crisis – notably over-borrowed Russian resources groups such > asRusal, the aluminium group; and some Mexican companies, including > Cemex. “There are huge disparities in performance within sectors > and within countries,” says Alok Kshirsagar of McKinsey > consultancy’s Asia Centre. > > But there is no doubt which way the economic winds are blowing. > “From my new base in Hong Kong, the shift from west to east is > clearer than ever,” Michael Geoghegan, chief executive of HSBC, one > of the world’s biggest banks, said last week. “In developed > markets, the risks of double-dip recession and stagnation haven’t > gone away. In contrast, recovery in emerging markets looks secure.” > said Mr Geoghegan, who this year moved from London to Hong Kong. > > Driving emerging market companies are their domestic economies. > While developed countries’ gross domestic product contracted 3.5 > per cent last year and are expected to record sluggish growth of > about 2.5 per cent in 2010, the emerging world avoided recession and > is forecast to bounce back to a healthy 6.3 per cent this year. > 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, > a motorcycle manufacturer; Godrej, a producer of personal care > products; and cement makers such as India Cements and Grasim. “What > we find is that many Indian companies that focus on India itself > have done extremely well,” says Kwok Chern-Yeh of Aberdeen Asset > Management Asia. > > Asia – and especially China – is living in a credit boom that > contrasts sharply with the scarcity blighting western Europe, the US > and, to a lesser degree, eastern Europe and Latin America. While > there are concerns the boom could end in a bust, for now, Chinese > companies have cheap finance. > > By contrast, the emerging market companies that have suffered are > those in countries that followed the developed world into recession > – notably Russia, where 2009 output fell 7.9 per cent; South > Africa, (down 1.8 per cent); and Mexico (down 6.5 per cent), the > laggard of Latin America. Russian tycoons who borrowed heavily > before the crisis have been forced to sell assets to cut debts, most > notably Oleg Deripaska, Rusal’s main shareholder. > > The most visible – and most controversial – element in emerging > multinationals’ expansion is corporate acquisition, seen by many > directors as the fastest way to advance. Li Shufu, Geely’s poetry- > writing founder, says the Volvo takeover is the perfect antidote for > what his own and most other Chinese carmakers lack: technology, > research capability and a reputation for quality and dependability. > > While the overall quantity of capital flowing from the developed > world into emerging economies is still far greater than that going > in the opposite direction, in corporate acquisitions it is a > different story. Last year, for the first time, takeovers by > emerging world companies of developed world groups exceeded > takeovers going the other way – the former valued at $105bn, the > latter at $74.2bn, according to Dealogic, a business data company. > > “In the next few years we will see a growing number of acquisitions > in Europe and the United States by companies based in emerging > markets, es pecially in Asia and South America,” says Rodolfo De > Benedetti of CIR, an Italian conglomerate. “These companies today > have considerable financial resources and good management, and are > interested in entering new markets and acquiring competitors.” > > As well as the developed world, new corporate investment is being > targeted at other emerging markets – often challenging western > groups. The race for natural resources is particularly tight, with > China and India leading the way. Not to be left out, Vale, the > Brazilian miner, last month paid $2.5bn for a half-share in a remote > iron ore deposit in Guinea. For South African companies, raised on > links with the west, investing in Africa is a new “orthodoxy” > says Jacko Maree, chief executive of Standard Bank, the country’s > biggest. > > Alongside acquisitions, partnerships matter in a globalised world, > with scores of joint ventures already set up between developed world > motor groups and their emerging market counterparts. In the latest > case, Peugeot Citroën, the French carmaker that has lagged behind > other foreign groups in China, this month announced a joint venture > with China Changan to supplement production capacity it already has > in the country. > > However, the terms of trade bet ween developed and emerging market > groups are changing, with power shifting to the emerging world. “We > are seeing a bit of a pendulum shift. Five or 10 years ago, a > multinational would tell you what to do ... now working together is > a true joint venture,” says McKinsey’s Mr Kshirsagar. > > > Cross-border deals are not easy. First, timing is crucial as > companies that made big-ticket acquisitions just before the crisis > found to their cost – notably Tata, India’s biggest business > group. In 2006-08, it bought Corus, the European steel group, for > £6.7bn in India’s largest foreign acquisition; and Jaguar Land > Rover, the UK carmaker, for $2.5bn. The assets plummeted in value > during the recession, leaving Tata managers struggling to > restructure their acquisitions. > > Next, the cultural gaps between emerging economy owners persist. > Chinese managers feel as alien on the Tyne in north-east England as > western executives do on the Yangtse. According to Tarun Khanna and > Krishna Palepu, authors of Winning in Emerging Markets, a study > published last month: “Securing and instilling global standards and > capabilities throughout an emerging markets-based organisation is a > difficult, long-term task.” > > Finally, there can be 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, a US network technology > company, from Bain Capital and Huawei, the Chinese telecoms > equipment-maker, failed in 2008 when Washington objected. In Europe, > the ambitions of Russian state-run energy group Gazprom to expand > into the European Union have been contained by political concerns. > > But as Japanese companies found 25 years, ago these barriers can be > overcome. Even before the crisis the corporate order was changing, > with companies from China, India, Brazil and other emerging > economies forging ahead in global industries. Their advance has now > become a charge. > > > Additional reporting by Geoff Dyer in Beijing, James Lamont in New > Delhi, Kevin Brown in Singapore, Richard Lapper in Johannesburg, > Adam Thomson in Mexico City and Jonathan Wheatley in São Paulo > >
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