Finance chiefs, by their nature, rarely need to be reminded that, "If it sounds too good to be true, it probably is." But with domestic demand sluggish at best, many are looking to overseas markets for growth, and there is a marked tendency to put on rose-colored glasses when doing so.
Of course, the BRICs (Brazil, Russia, India, and China) and even the CIVETSs (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) might not be as exotic as they once were. Nonetheless, who isn't bedazzled by the growth stories being reported from these developing countries?
It's not just that many of these countries survived the recession more or less unscathed and are back on growth trajectories that most developed markets can only dream of. According to many predictions, collectively they may soon eclipse today's developed countries. Anil K. Gupta, professor of strategy at Insead business school in Singapore and co-author of Getting China and India Right (Jossey-Bass/Wiley, 2009), says that at current market exchange rates, emerging markets, which account for just over 25% of global GDP today, will increase that share to more than 50% in 15 years.
Many, if not all, companies understand what that means for them. Gupta recalls that at a recent conference in Shanghai, the CEO of a global advertising company said that the big emerging markets "are like the Premier League, [and] if we don't win those markets, the rest doesn't matter." Or, as Gupta himself puts it, "The goal isn't just to be there; the goal is to be there and win."
But what role does the CFO play in helping a company win? Increasingly a strategic one, both in terms of sounding a note of caution and determining how to forge ahead.
"It always strikes me that when companies think about expanding abroad, they almost always look only at market characteristics — the number of customers and so on," says Freek Vermeulen, assistant professor of strategic and international management at London Business School. "Yes, it can be very nice that there are lots of customers [in those markets] with money to spare, but you need to start the other way around and look at internal stuff and ask, 'What are we good at, and will our competitive advantage work in an emerging market?' If the answer is no, don't go."
But if the answer is yes, a big job lies ahead for the CFO — to begin challenging the old assumptions that the company has long held about these new markets.
More Different Than Similar
One such assumption is that a company needs only two strategies, one for home and one that lumps the rest of the world into a single "international" group.
On paper, having just one international plan seems sensible, particularly from the standpoint of efficiency and clarity. But it oversimplifies. Fast-moving consumer-goods multinationals, such as Kraft, Unilever, and Procter & Gamble, figured that out years ago and now spend millions developing, country by country, localized products, packaging, and prices to gain market share in tough countries like India.
Now other companies are doing the same. "We've learned that all of our customers are more different than similar," says Kyle Gendreau, CFO of Samsonite, the privately held U.S. luggage company. He says Asia — not only Japan, but also emerging markets in the region like China and India — will not simply drive Samsonite's growth but "have the potential to double our revenue in the next five years."
A key to growth, says Gendreau, is that the company decided two years ago to abandon its centralized global philosophy and "empower" country general managers, allowing them, for example, to develop marketing and distribution strategies "to push the products" as they see fit, versus relying on corporate headquarters to dictate the plan. "Letting people be entrepreneurial on the ground drives growth," he says. "It's really paying off for us."
Another practice that requires a rethink: determining exactly where the best markets are. For example, Mike Devine, CFO of Coach, the $3.3 billion, New York–based handbag and accessories company, says that while China's megacities, including Beijing and Shanghai, have helped Coach's sales double year on year (to $100 million in fiscal 2010), the company is now also increasingly focusing on the country's relatively smaller "tier-two" and "tier-three" cities. Those cities, which include Chongqing and Dalian, are home to a large portion of the country's new middle-class and will be attracting many of the 300 million rural Chinese expected to migrate to towns and cities in the next 10 years.
They are also home to many of Coach's 75 million target customers (urban men and women born after 1966 who earn at least $10,000 a year, a consumer population that will increase to more than 200 million in the next five years). Of the 25 Coach stores being opened in China during the current fiscal year ending in June, Devine says only a "handful" will be in the biggest cities, while the majority will be in the tier-two cities, with "tweaked" marketing and product strategies to appeal to local shoppers.
This universe of fast-growing cities is expanding quickly. A recent report from Boston Consulting Group identified 717 cities around the world with populations of more than 500,000, and noted that another 371 such cities will reach this size by 2030. Among them are Ahmedabad, India; Curitiba, Brazil; and Jakarta, Indonesia. By 2015, these cities will account for 30% of global private consumption, which is growing 11% annually.
Don't Rest Easy
A third assumption is that emerging markets have, by now, modernized and globalized. That's only partly true. Consider China. It has been nearly 10 years since it became a member of the World Trade Organization and adopted a host of new laws and agreements that facilitate more foreign investment.
Those improvements, while critical, often lull executives from developed countries into a false sense of security, asserts Nandani Lynton, adjunct management professor at China Europe International Business School in Shanghai. "Years ago I used to think, 'Oh, there's another CEO who has checked his brains at Immigration.' People were just getting carried away by the huge market and the stories of growth," she says. "The same mistake is being made today, but it's no longer because the markets look so exotic; it's because the CEO or CFO who comes to visit is made to feel so comfortable."
One symptom of this tendency, Lynton says, is that executives "are not asking the questions they need to ask to get beyond superficial answers." For example, she says, "an executive will ask, 'Can we buy this land?' and the answer will be, 'The land is no problem.' What might not be mentioned is that you can't get the title deed, or it might hinge on your partner's relationships with government. If you don't keep asking questions, you'll never find out."
Lynton refers to this as part of the "built-in fuzziness" of doing business in China. "Even now, having gone from virtually no [commerce] laws to shelves full, the laws are written so that judges have [substantial] wiggle room. It's a cultural pattern that often runs counter to an American way of thinking, in which 120-page contracts are the norm."
There's another layer of complexity that can catch foreign executives on the back foot, she says: "You have to be very aware of government in a way that you do not in a developed market. Many CFOs struggle to understand the interlocking of government and business."
This isn't unique to China, and it's more predominant in some sectors than in others, points out David Davies, CFO of OMV, a $36 billion Austria-based oil-and-gas company. "The oil industry is inherently political," says Davies. "Security of energy supply is a fairly critical factor for any incumbent government."
Despite many parts of the region moving closer economically, politically, and socially to the European Union, Davies says they are still under development, including their legal systems. His firm has faced legal issues with current and former employees regarding the way collective employment contracts have been interpreted "that cost us several hundred million euros. We lost cases where any sensible reading of the contract and understanding of modern jurisprudence would have led us to a completely different conclusion."
Far and Away
The final emerging-market assumption worth challenging may take many CFOs far out of their comfort zones, literally. Most companies have figured out that it pays to have their CEOs and CFOs spend time in emerging-market offices — academic studies have even shown that doing so improves the performance of those ventures. But how many would actually move their corporate headquarters to a major emerging market? Insead's Gupta says he can imagine the day when a CEO or CFO will be based in an emerging market, with his or her direct reports located in a developed-country headquarters, the reverse of today's norm.
That trend may not materialize for some time, but Gupta says he knows of a number of developed-country companies "seriously weighing" whether to list on emerging-market stock exchanges. Last June, UK-based Standard Chartered listed on Mumbai's stock exchange, adding to its London and Hong Kong listings and "signaling to India's government that it is there to stay," says Gupta.
The most important ingredient for success, he says, is to "stop looking at emerging markets through the lens of developed markets. That is a recipe for disaster."
Janet Kersnar is a London-based journalist.