EMERGING MARKETS BUSINESS
3 Things to Do Before You Expand Across the Pond
When it comes to expanding overseas, the United Kingdom has an undeniable appeal. There’s the common language, of course, and some pretty attractive tax rates. And there’s the fact that the U.K. is the fastest growing economy in Western Europe.
Still, as with any expansion effort, the trick is getting the details right. To figure out what’s most important to nail in the U.K., Inc. talked to British Consul General Danny Lopez, who also serves as the Director General of UK Trade and Investment, the foreign commercial arm of the British government. Here are three pieces of advice he offered:
Get a Local Lawyer
You might have a great attorney in the U.S. who has helped you sail through all kinds of startup issues. But expanding overseas is a different task in a different context. Having a local legal presence is hugely important to your success, Lopez says, especially as you navigate the nuances of trademark protection. A trademark in the U.K., for example, does not apply to the entire European Union–for that, you need to apply for a separate Community Trademark, or CTM. To avoid potential legal hotwater, find someone on the ground who can help you get familar with U.K. policies.
Get a Local Accountant
While you’re looking for local legal expertise, find a good U.K. accountant as well. Among other things, you’ll want to understand the different tax implications abroad. It’s worth noting that the U.K. corporate tax rate has decreased from 26 to 21 percent over the past three years for profits above 300,000 pounds, and there’s no witholding tax, according to London-based law firm Ashurst LLP. Ireland (most of which is not part of the U.K. but it’s close enough) boasts an official corporate tax rate is 12.5 percent, though tech firms wind up paying far less than that–a perk that has certainly boosted Dublin’s startup scene.
While we’re on the subject of money, Tejune Kang, founder and CEO of Silicon Valley-based digital tech consulting company Six Dimensions, warns that watching your cash flow is one of the most critical things you do when you do work overseas. “I would advise to collect as much payment in advance so that you can attack obstacles around currency conversion and have as many communications [with customer] around setting expectations as possible,” he told the Entrepreneurs Organization earlier this year. And just know that things will never go as smoothly as you think, so build extra time into deadlines.
Don’t Assume Big Cities Are Better
Your first instinct is probably to settle in the capital where, it’s true, networkingopportunities abound. Lopez describes an area of East Central London known as “Tech City,” or, more affectionately, “Silicon Roundabout.” He compares it to the booming business scene of Brooklyn’s Dumbo as “an ecosystem that brings the big guys and the smaller guys together.” In Tech City, up-and-comers like Aerial, a design consulting company, are nestled next to giants like Amazon and Facebook. Google recently announced plans to open up a $100 million VC fund for startups in the area. But Lopez warns against missing out on other, less glittery opportunities that exist outside of London. A healthcare startup, for instance, might benefit from settling down near the academic meccas of Oxford and Cambridge. Bottom line: Do your research (and be sector-specific) before you set up camp.
With $50M banked, HelloFresh CEO plans ‘global consumer food brand’ (interview)
Above: A HelloFresh box.
“We take all the not so enjoyable parts out of the experience and make cooking an appreciated part of your weekly routine,” states Dominik S. Richter, the founder & global CEO of HelloFresh.
The number of competitors shows there is a market for this type of product. In the United States, the two biggest players are Planted and Blue Apron, with $5 million and $50 million investment respectively. Worldwide, there are several more. However, in Germany, KommtEssen, Unsere Schlemmertüte, and Kochzauber have a very difficult time gaining traction in the market, an insider told VentureVillage.
In his interview with VentureVillage, Richter spoke about the $50 million funding HelloFresh just raised mainly from New York-based Insight Venture Partners. He also shared with us the changes that occurred through company growth and how he feels about Berlin as a startup city.
VentureVillage: HelloFresh just raised a Series D. What will the company spend $50 million on?
Dominik S. Richter: HelloFresh has been growing incredibly since the early days, however, we are still only at the beginning of a long journey. Our vision is to establish a whole new category on the wider grocery market and build a truly global consumer food brand.
VentureVillage: What are HelloFresh’s future plans and are there other fields HelloFresh could expand to?
Richter: Both geographic expansion to new and within existing countries is on the roadmap. With regard to product expansion, we work on improving service and product levels all the time. This obviously includes new product lines as well.
VentureVillage: How big is HelloFresh now?
Richter: We are currently present in Germany, Austria, Netherlands, UK, USA, and Australia. Our offices are in Berlin, London, Amsterdam, New York, and Sydney, and we now count 120 employees.
VentureVillage: With 120 employees, how hard is it to keep the startup spirit?
Richter: We don’t struggle with that. Part of the reason might be that although we have been growing rapidly, we have kept rather small teams in all our countries. We hire very slowly and greatly believe in small and empowered teams. Many of our employees have actually been with us for a long time and remember the day when we were packing our product in someone’s living room.
VentureVillage: Why is Berlin the right city for your startup? What is still missing?
Richter: Berlin is an amazing city for a startup. There is a lot of talent, a great network and affordable infrastructure. What’s missing is the risk-reward profile that is common in Silicon Valley. Here, high performing employees often do not appreciate and value stock and stock options correctly, thus making it hard for early stage startups to win over great talent from more established industries or players who can pay better salaries. I think this due to the fact that not a lot of wealth has been created through stock in Berlin so far, i.e. lack of role models, but I hope this will change if we have a couple of good exits in Berlin.
VentureVillage: If you could start all over again, what would you do differently?
Richter: With hindsight, I would have done 100 small things differently but then I also know that “with hindsight” is a heavily biased view. It is easy to come up with a narrative but much harder to make decisions in real-time with limited information. As an entrepreneur, it is better to focus on the future and that’s what I try to do rather than think about what we could have done differently in the past.
This story originally appeared on VentureVillage.
Why Emerging Markets Should Look Within
A supermarket in Buenos Aires, where consumers have been dealing with a slide in the value of the Argentine peso. Government price controls have affected hundreds of grocery items. Rodrigo Abd/Associated Press
In recent weeks, Argentina, Turkey, Ukraine and Thailand have endured plunging currencies, capital flight and political disruptions in varying combinations. While they have all been affected by global economic tides, these nations are facing crises because of problems in their national governance. And if we look elsewhere around the world, we find that governance has been re-emerging as a major factor behind success or failure in many emerging nations
It’s not that macroeconomic quandaries have gone away in all of those countries. There are still many such issues: how to deal with current account deficits, for example, or how to face the consequences of tighter monetary policy in the United States. But these concerns were foreseeable, and some countries have been meeting them, if imperfectly, while others are letting these problems push them over the precipice. In this context, good governance means directing political energies at strengthening the economy rather than trying to cement power and keep down the opposition.
This new world contrasts with two earlier waves of change. The first started in the 1990s, when a rising China bought and invested in raw materials at an unheard-of pace. That flow of purchasing power was so strong that it brought better times to other emerging nations, including many in South America and Africa, regardless of whether the individual countries had good governance in place.
The second major wave was the recent global recession, which damaged the commercial prospects of many nations. For instance, in the first quarter of 2009, the gross domestic product of Singapore fell at an annualized rate of 8.9 percent. That wasn’t because Singapore had bad economic policy, but because exports were hit by a global downturn beyond the country’s control.
The two waves have had such noticeable effects that we’ve become unaccustomed to evaluating political fundamentals in individual nations. But these waves, though not quite over, have slowed. Many of the advanced economies have returned to financial normalcy, albeit with stunted employment. And the Chinese growth juggernaut is slowing.
Let’s consider the role of governance in four countries facing some of the most pressing crises:
ARGENTINA Not long ago, Keynesian economists were heralding Argentina’s economic policy as an example of successful economic stimulus. But the government continued to inflate the currency excessively, legally suppressed accurate economic statistics to cover up this inflation and confiscated pensions to pay the government’s bills. The results have been a currency crisis and a hemorrhaging of reserves.
TURKEY Its once-heralded political turnaround turned out to have serious flaws, including a government that imprisons many journalists and is arguably heavily influenced by secret internal cliques that are sometimes called “shadow states.” Turkey has a well-diversified and fairly productive economy, but its central bank is facing speculative attacks on the currency as market confidence in Turkish policies has plummeted.
UKRAINE Having rejected a European trade deal, the country accepted Russia’s guarantee of part of its budget, temporarily stemming a financial crisis. Now Ukraine is torn between building closer ties to Russia or to the European Union. There is political chaos and violence, possibly to be followed by a financial crisis after all.
THAILAND Like Turkey, Thailand was widely considered a middle-income country that had turned the corner on governance and sustained economic growth. Yet now there is regular violence in Bangkok, and significant political forces want to suspend democracy. Tourists and foreign investors are growing wary of the country, which probably faces an economic slowdown and possibly worse.
What is striking about these stories is how rooted they are in each country’s daily internal struggles. Indonesia, India, South Africa, Brazil and Russia also appear vulnerable — and, again, it’s largely because of an inability to solve domestic problems. It’s not primarily because they have been whipsawed by unstoppable global trends.
But by no means are all countries headed down such dangerous paths. Chile, Mexico and Malaysia are a few more positive examples. They have persistent problems, but the economic data in each case indicates a brighter future. Mexico, for instance, has had a marked economic slowdown, but it has pressed forward with liberalizing its energy sector and has begun some much-needed reforms to primary education. Drug-related violence is worsening in Michoacán, but subsiding in some northern cities. Democracy appears robust.
It’s not yet clear how to characterize China, as far as governance goes. For all of its economic progress, there are still many signs of dysfunction in political institutions, like corruption among the party elite and an unwillingness to take on state-owned factories and energy companies to fight worsening air pollution. It’s also not clear whether the Chinese are succeeding at rebalancing their economy toward consumption. Most important, we don’t how robust its political system would be in a serious economic downturn. Yet China is important enough globally that if its economy imploded, many other nations would have crises, too, no matter what they did on their own.
So we’re now at a point where many global macroeconomic factors have been muted. That means tougher tests, including political ones, for quite a few emerging-market nations. And maybe 20 years from now, we will no longer be calling this entire group of countries “emerging.” It’s not only that many will have emerged — it’s also that some may fall off the track of progress altogether.
Emerging Markets Go to the Polls
Elections in Brazil, Elsewhere Add Uncertainty for Investor
Five large emerging-market countries—Brazil, India, Indonesia, Turkey and South Africa—all go to the polls in 2014.
Their new leaders will face a changed world. The Federal Reserve is winding down its program of monetary stimulus, which has pumped epic volumes of cash into the global economy and benefited few players more than large emerging-market countries desperate for foreign cash.
Without that ballast, investors say, countries that fail to put in place economic overhauls will suffer.
Five large emerging-market countries—Brazil, India, Indonesia, Turkey and South Africa—all go to the polls in 2014. Pictured here, anti-government Alevi protesters shout slogans during a demonstration in Istanbul in June 2013. Reuters
“As the Fed begins to taper, investors will start to become a lot more demanding,” said Greg Saichin, head of global emerging-market debt at Allianz Global Investors, which manages €322 billion ($443 billion) of assets. “Reforms need to come back to the table for emerging-market countries.”
The elections come at a precarious time for emerging-market nations. The frenetic economic growth in recent years that lured foreigners to pour billions of dollars into regional stocks and bond markets has stalled. Higher inflation has bitten into savings and public anger over governance has spilled onto the streets in places such as Brazil and Turkey.
Last month, the Fed announced its long-awaited pullback from economic stimulus. Global markets have reacted relatively calmly, with no sign of the panic experienced earlier in the year when the Fed initiated discussions about such a move. Emerging-market investors took the Fed move in stride, but investors are keeping a close eye on how some crucially large economies will fare without the foreign-money inflows.
Among the so-called Fragile Five, investors are perhaps most bullish on India in 2014.
The prospect of a win for the pro-reform Bharatiya Janata Party at general elections due before the end of May has increased the allure of Indian assets for investors, including Mr. Saichin and Sam Finkelstein, head of emerging markets and global currency atGoldman Sachs Asset Management, which oversees about $37 billion in emerging-market debt.
The Bharatiya Janata Party, currently in opposition in the world’s second-most populous country, emerged as the top vote-getter in local elections in four provinces in early December. Investors cheered the move by sending India’s benchmark stock index to a record.
Growth in India’s economy picked up to an annual pace of 4.8% in the three months through September from 4.4% three months earlier. The trade gap has narrowed as the weak rupee has bolstered exports and the government has moved to curb gold imports.
While the ruling coalitions in Brazil (elections in October) and South Africa (elections likely in the second quarter) are expected to win, investors say they will be eager to see more progress in lifting roadblocks in the labor market, spurring economic growth and keeping a lid on inflation.
Brazil appears vulnerable to a negative assessment by ratings firms because the government has struggled to rein in spending. Lack of economic overhauls, fractious labor relations and shrinking profit margins at South African companies are causes for concern over the long run, said Rob Drijkoningen, co-head of emerging-market debt at Neuberger Berman, which manages $227 billion of assets. He is betting on shorter-dated South African interest rates to decline.
In Indonesia, opinion polls suggest continued fragmentation of Parliament. Legislative elections will take place in April, while the presidential vote is due in July.
Across the Fragile Five, the need to appeal to voters ahead of the elections means that governments could hold back unpopular measures in the near term.
“Structural reforms have political costs and they are unlikely to be implemented in times of electoral campaign,” said Mr. Finkelstein.
Write to Neelabh Chaturvedi at neelabh.chaturvedi@wsj.com and Serena Ruffoni atserena.ruffoni@wsj.com
Starting a Company in Brazil: Not for the Faint of Heart
Wharton K@W
In the winter of 2011, Davis Smith was cruising at 35,000 feet. His spirits should have been even higher. He had just obtained US$23 million in funding to secure the first stage of growth for his promising new start-up in Brazil, baby.com.br. As with any start-up, there would be a multitude of challenges to overcome before his fledgling company could fulfill its sky-high potential. However, instead of celebrating his recent victories and focusing on building his company, Smith was on a flight back to the U.S. to resolve Brazilian work-visa issues that had arisen during the final stages of putting everything in order.
These visa issues, while serious, were merely the latest in a series of headaches Smith faced in getting his company off the ground. For example, he had just finished a six-month process to incorporate his business as a legal entity, wading through huge amounts of red tape and schmoozing the gatekeeper officials. After all his efforts, baby.com.br was finally up and running, but he had to return to the U.S. to obtain a specific type of visa so he could manage his company legally as a foreigner in Brazil.
Ultimately, obtaining this visa took Smith two pivotal months — during the embryonic stage of the company’s launch. “The process is a black box,” he states. “Sometimes you have no idea you are missing a document or some other deliverable until at the next milestone when government agents notify you there will be an unforeseen delay due to some undisclosed new stipulation, even if you have fulfilled all of the process requirements. There is definitely a lack of transparency, and it requires serious patience.”
Starting a company in Brazil is a difficult process that is not exclusive to any one entrepreneur or industry. Widespread bureaucracy and administrative hurdles create major challenges that all entrepreneurs face there. According to the International Finance Corporation, the private-equity arm of the World Bank, it takes on average 130 days, approximately R$2,038 (US$900) and 43 documents to open a new business in Brazil from scratch. Some of the required steps include registering with the commercial board of the state, registering with federal and state tax organizations (which takes a month on average) and applying to the local municipality for an operations permit (an additional 90 days). In its most direct form, there are more than 13 official steps in the process. Unfortunately for entrepreneurs, most of these steps build on each other sequentially, thus making it impossible to tackle them simultaneously to hasten the process.
Moreover, the actual experience faced by many entrepreneurs indicates that the total amount of time and total cost can far exceed the aforementioned figures. For example, the estimates fail to include the additional costs required for a few Brazilian jeitinhos (an expression used to describe the local way of doing things in Brazil, often circumventing rules and social conventions), which are essential in many instances to taking certain mandatory steps. “For an early stage start-up here in Brazil, you spend more than 50% of your time tackling administrative issues, such as visa, local residency, proof of address, [and] registration, and 50% of your time on your own company’s operations and strategy. In the U.S., the ratio would be more like 20% (administrative) to 80% (strategy and implementation),” notes Ben Gleason, CEO of Brazilian start-up Guiabolso, which provides services in Brazil similar to those of Mint.com, a free web-based personal financial management service in the U.S. Other entrepreneurs have stated that it is actually advisable to hire a full-time employee to focus solely on administrative issues to expedite the company’s registration process. While this solution may seem costly, the long-term benefit could greatly exceed the short-term frustration of attempting to tackle the many steps involved.
Widespread bureaucracy and administrative hurdles create major challenges that all entrepreneurs face there.
One alternative to starting the entire six-month process of creating a company from scratch is to buy a “shell” company — typically purchased from a law firm. For several thousand dollars, a founder can take legal possession of an entity and start in the middle of Brazil’s onerous incorporation process. This strategy shortens the procedure and speeds up an entrepreneur’s access to his or her target market. Those who have employed this approach report varied experiences. Some have cut the process in half, to just over three months, while others have managed to save only a month or two. But in general, everyone has the same experience — disbelief and frustration with delays, bureaucracy and cost.
Enter the Fire Department
Entrepreneurs maneuvering through the process — in either form — often discover steps that are unnecessarily inefficient, complex or even redundant. For example, establishing a nationwide online portal to check the availability of a company name and logo would save a great deal of time and increase efficiency. Currently, registering the name of a new business involves personally visiting the local Junta Comercial and asking the staff to run a search for your proposed name. While the cost is low, results can take several days. Establishing a logo is even more difficult, as no formal process currently exists. This lack of structure often generates unnecessary delays and can lead to involuntary copyright infringements; frequently, entrepreneurs are unable to determine if a logo is already being used by an existing company in another state. By creating an online registry of this information, the government could simplify both steps.
Another example is the requirement that the fire department certify the safety of the business location. The cost of this two-part step represents about 25% of the total company-creation process (US$200). It begins with an extremely detailed in-person presentation of the chosen location’s layout, which must meet very rigorous standards. The fire department must then visit the location to verify the information provided. While safety is an important matter, the process is unnecessarily long and expensive. In addition, it fails to differentiate companies that require specific inspections, such as industrial firms, from those that could undergo a much simpler and cheaper process. Such examples, which are different or altogether absent in other similarly situated countries, highlight but a few of the inefficiencies that could be improved or removed.
Implementing change and efficiencies, however, could be among the greatest obstacles to stimulating entrepreneurship in Brazil. Despite what the continued problems may suggest, the Brazilian government has not been completely silent about improving this process. For example, in 2009 it passed a new law that eliminated the need for all the required documents to be notarized. Unfortunately, this law has yet to be enforced. Without effective communication and enforcement of new laws, additional efforts to streamline the process may be futile, further stifling opportunities for entrepreneurship in Brazil.
On a global scale, these problems are reflected in Brazil’s rankings relative to other countries.
Another key aspect for foreign entrepreneurs in Brazil is the importance of relationships. According to baby.com.br co-founder Thomas Kimball, “down here, relationships are currency.” At many points in the formation of a business, who people know and how well they know them can be a deciding factor in their success. One solution that could be of significant benefit would be the ability for foreign entrepreneurs to contact and work with locals. A local business in Rio de Janeiro is trying to bridge these gaps. Co-founded by American entrepreneur Benjamin White and Brazilian Marcelo Sales, 21212 was created to connect foreigners with local Brazilian entrepreneurs as a way to facilitate the realization of the latters’ ideas. While efforts such as this have helped, the number of obstacles continues to hinder entrepreneurship in Brazil.
On a global scale, these problems are reflected in Brazil’s rankings relative to other countries. In 2013, the World Bank’s “Doing Business” Index ranks the country at 130 (out of 185 countries) in the world in terms of ease to do business or start a new company. This compares poorly with regional peers such as Chile (37), Colombia (45) and Mexico (48), which have been drawing increasing capital away from Brazil over the last two years while providing attractive frameworks for entrepreneurs to open new businesses. For example, dealing with construction permits is significantly easier in Mexico (ranked 36 in this category) and Colombia (27) than it is in Brazil (131). Similarly, obtaining local credit, a key element for any start-up, is much easier in Mexico (40) compared to Brazil (104). While the government has made efforts to create institutions that encourage entrepreneurship and to fund new companies, such as the Brazilian Innovation Agency (FINEP), or to foster grants from local development banking giants, such as the Banco Nacional de Desenvolvimento Econômico e Social e Social (BNDES), the reality is that the process continues to be highly bureaucratic. A select few favorites and local champions obtain the majority of the funding while others are left in the dust. Finally, high direct and indirect taxes in Brazil (ranked 156) are another major hurdle for entrepreneurs, whose costs may well surpass their budgets.
Low-growth Economies
These rankings are particularly worrisome in light of a currently stagnant Brazilian economy (expected to grow about 2.0% in 2013 after growing just 0.3% in 2012) that is very much in need of entrepreneurs, new businesses, and capital inflows. According to The Kauffman Foundation, which helps to produce the Global Entrepreneur Monitor reports on entrepreneurship for 90 different countries, “small- and medium-size enterprises are responsible for 96% of all jobs in Brazil and 98% of all companies in the world,” further reflecting the importance of business creation in the country. The potential benefits, however, are not only economic. Scientists studying entrepreneurship have found that stimulating this sort of activity can have a positive social impact and can further promote economic activity both within and outside the sector. This means that, moving forward, Brazil will need to implement major improvements to facilitate business-creation processes and incentivize investors to take advantage of the massive Brazilian consumer market of just over 200 million people.
Looking to the future, the country has reached a potentially watershed moment in its history of entrepreneurial activity.
As the country with the third-largest index of entrepreneurial activity, it is difficult to believe that Brazil’s government has failed to effectively incentivize this activity to date. Looking to the future, the country has reached a potentially watershed moment in its history of entrepreneurial activity. Whatever the statistics were before, playing host to the Olympic Games and the World Cup should spur a flurry of economic activity. Using these events as a kick-starter, the government should take full advantage of this ideal time to change regulations and processes and support its entrepreneurial population.
The race is on. Other countries have already recognized the value of this entrepreneurial activity to an economy and are introducing enormous changes to become more competitive and to attract foreign investment. Thus, far more government resources must be dedicated to promoting entrepreneurship in Brazil in the near term. The current state of its economy demands that the country find a way to stimulate growth. Given the size of its consumer market and wealth of resources, Brazil presents attractive opportunities for entrepreneurship for both local and foreign sources. However, with such complex and costly processes, when compared with neighboring countries, and no sign of improvement, it risks losing a potentially major source of innovation and economic stimulus. While entrepreneurship is not the only solution to Brazil’s financial situation, as it stands, the country is wasting this opportunity. As a result, the next baby.com.br might well be baby.com.mx.
Ukraine to sign $10 billion shale deal with Chevron
* Shale deal will be second for Ukraine
* Ukraine seeks gas independence from big supplier Russia
Oct 30 (Reuters) – Ukraine said on Wednesday it will sign a $10 billion shale gas production-sharing agreement with U.S. energy major Chevron next week – its second such deal this year.
Ecology Minister Oleh Proskuryakov said the deal for exploration and extraction at the Olesska site in western Ukraine, which follows one signed with Royal Dutch Shell earlier this year, would be signed next Tuesday at a regional economic forum in the capital Kiev.
Deputies in western Ukraine cleared the way for a deal when a majority voted in favour of the government’s plans for exploration at Olesska, overcoming opposition from local lobby groups concerned at possible ecological damage from the project.
Everything you need to know to create the next big company in Latin America
From my personal experience, Latin Americans often see Internet and the tech scene as the magical potion that’ll make us more like our idealized image of North Americans. It is as if we think that by being part of the international tech ecosystem, our teeth will become straighter, we’ll become a bit taller, our hair will grow blonder, and our problems will somehow disappear.
Latin Americans historically have an inferiority complex. That’s likely why it took us 450 years after being “discovered” to grab a map of the world, turn it on its head and put Latin America in the center of things (thanks to the Uruguayan artist and thinker, Joaquin Torres-Garcia).
What does our so-called inferiority complex have to do with the tech scene in Latin America? Well, just about everything.
The vast majority of tech companies that are being created in Latin America today are designed for the public that either doesn’t exists or barely exists (in terms of numbers).
Until we look ourselves in the mirror, understand who we are, and begin to value ourselves, we will continue to create companies that aren’t relevant in Latin America. While they may attempt to connect local consumers to the world, they do not connect us with the local markets. And without a local market, these companies will generally not be of interest to the international investors or acquirers whose attention we desperately seek.
What can the mirror tell us about the next big company?
Rather than read news articles to formulate ideas for your next company, I encourage any budding Latin American entrepreneur to get on Wikipedia. Start thinking about who we are in Latin America and what clues our demographics give as to where the opportunities lie.
Let’s compare for a minute the “North” versus the “South.” We will see the opportunity for real growth is in the “South” not the “North.” For the purposes of this article, we will consider the “North” as U.S. and Canada, while the “South” is Latin America including Mexico and Brazil.
| The South | The North |
| $5.3 trillion economy | $15 trillion economy |
| 581 million persons | 351 million persons |
| 254 million internet users (18mm ’00) | 273 million internet users (108mm ’00) |
Let’s start with the top line. Until I saw the total size of the economies, I was under the impression that the United States and Canada must have economies 10 or 20 times the size of ours in the South.
I, like many Latin Americans, have been taught to think that somehow that our economies were “interesting” but not “relevant.” It turns out our economies combined are about 1/3 the size of the U.S. and Canada’s $15 trillion. When valued by relative purchasing power, that gap narrows greatly.
While in terms of sheer economic might, the South may not be on par with the North, we are at least in the same neighborhood. We need to appreciate that as a region, Latin America is relevant in terms of our economic muscle.
The next thing we have to recognize about ourselves is that we are a lot of people. Our population may not rival China, but we are almost double the number of residents in the North – nearly 600 million people compared to 350 million in U.S. and Canada. As far as the size of our combined population, Latin Americans must understand that we aren’t just relevant. We are significant.
Consumer growth throughout the years
Since I am focused on the demographic take aways for technology-enabled business, the next data point is perhaps the most important. In 2000, there was a total of 18 million Internet users in Latin America. That was about 5 percent of LatAm’s populations at the time – and it’s safe to assume that only the wealthiest 5 percent of Latins were online.
To put 18 million Internet users into perspective, Urbita.com, a social travel site I helped co-found, today has more than 10 million unique visitors a month. And Buenos Aires-based Urbita has not even done a Series A round of financing.
In 2000, the U.S. and Canada combined had almost six times more Internet users than Latin America. And if you consider the number of internet users who had actually bought something online, I am certain that it was 1,000 to one. Remember, it was almost impossible in 2000 for someone from Latin America to buy goods on the Internet unless he/she had the fortune of holding a credit card issued in the U.S. or Europe.
Today the world has shifted. Latin America has as many Internet users as the U.S. and Canada combined – mainly thanks to the great migration to smart mobile devices. Both markets have more than 270 million Internet users; both represent about 11 percent each of the world’s Internet traffic. It only took a bit over 10 years for Latin America to catch up to its neighbors in the North.
However, 270 million connected consumers in LatAm still means that half of us have not gotten online – and we know those unconnected masses will get on-line soon. The North is hitting a glass ceiling in terms of connectivity with almost 80 percent of its population connected. It is just a matter of time until Latin Americans online outnumber connected North Americans.
The last thing we have to recognize is that while we have strength in numbers, our purchasing power relative to our peers in the “North” is significantly smaller.
The average GDP per family in Latin America is about $9,000 compared to the $50,000 in America. We need to understand that the consumers in the South not only have different tastes than their peers north of the Mexican border, but they have less money to spend and will spend their money in a different behavior.
That said there is a group of Latinos who’ve not yet been captured by these statistics – the 50+ million Latinos living in the U.S. and Canada. Entrepreneurs in Latin America generally overlook these “hidden” Latinos. If this diaspora of Latin consumers were considered a “country,” it would represent the third most populous country in Latin America after Brazil and Mexico.
Additionally, I suspect that given these Latin immigrants’ relative purchasing power, the mainly U.S.-based Latinos would probably have an economic consumption power equal to Mexico’s 100+ million consumers, tying it for second place in Latin America. If the U.S. Hispanic market is considered part of the “South,” Latin America becomes even more compelling.
So, what companies should we build?
What can these few statistics tell us about the tech companies we should be creating in Latin America?
First, we need to stop building companies targeted to the 18 million (mainly rich) Latin Americans who were online in 2000. Most of the tech companies we see being built in Latin America are targeting these same 18 million consumers. This is a gigantic missed opportunity.
We must not be afraid to build companies that address the problems of our remaining 270 million consumers. Most “copy cats” and projects that we create are inspired by American companies don’t cater to the needs of local consumers.
We need to start building companies targeted to the 250+ million that have come online in the past 13 years. In these past few years ago, 100+ million consumers in LatAm just got a hold of a smartphone.
Whether these consumers are in Latin America or Latinos currently in the U.S., these consumers are new to the Internet. Their needs are not yet being met and there is a tremendous opportunity to address this market. Those consumers are not rich and their needs are not yet being served online. They don’t have spare dollars to spend on in-app purchases and spontaneous shopping.
Take for example the following companies building a service to help this new generation of Internet user. Brazil-based Emprego Ligado helps low income workers find jobs close to home. Regalii in Mexico improves the options for Latino immigrants to send remittances back home. Un Techo Para Mi Pais’ Social Lab helps accelerate hundreds of social entrepreneurship projects throughout Latin America. But these companies are the exception, not the rule.
The next big tech company in Latin America will address the needs of the “new generation” of Internet user in Latin America. We should focus a product that supports lower middle income, hard working, honest consumers who often work two jobs with a very long commute on public transportation – not the market who bothers on whether to upgrade to the new iPhone 5s.
To start building great companies in Latin America, every entrepreneur south of the Rio Grande should hang Joaquin Torres-Garcia’s map of Latin America next to their photo of Steve Jobs. We need to celebrate who we are. We are much more than we give ourselves credit for.
Vamos!
Juan Pablo Cappello is an investor in more than twenty early stage companies. He is also the co-founder of Idea.me, Sauber Energy, and the LAB Miami. Juan Pablo was a partner in Patagon.com and was elected “Top 50 Entrepreneur” by Business Leader Magazine. His blog can be found at www.jpc.vcImage credit: Jess Kraft/Shutterstock
EMs pile pressure on developed countries
Policymakers in advanced nations should set policy so as to keep spillover risks to developing countries to a minimum, leaders warned
Policymakers in developing nations used the IMF/World Bank meetings on Friday to call on leaders in advanced countries to think about spillover risks when deciding policy as concerns of a US default on debt appeared to recede.
President Barack Obama and House Speaker John Boehner spoke on the phone after House Republicans offered to pass legislation that would end the government shutdown and avert a catastrophic default on US debt.
In a joint statement, the African Governors of the World Bank and the IMF said they were increasingly concerned about the spillover from global economic weakness. “We are also worried about uncertainty regarding the unwinding of unconventional monetary policies and the threat of potentially devastating budgetary challenges in the US which if left unaddressed could derail the fragile recovery,” they said in the statement.
“Therefore, we call on policymakers in advanced economies to be aware of negative spillovers of their policy actions and ensure that stimulus exit strategies are communicated clearly.”
But some policymakers in advanced economies insisted developing economies had benefited from stronger growth thanks to the loose monetary policy in the US, UK and elsewhere. UK Chancellor George Osborne said markets were differentiating between developing countries, which should not use the spillover as “an excuse” not to carry out reforms.
“We should recognize that there are spillovers from that monetary policy and we shouldn’t pretend they don’t exist,” Osborne told Emerging Markets. “We should help emerging markets deal with those spillovers. That said, those spillovers should not be an excuse for emerging economies to avoid doing what many of them need to do in terms of structural reforms to their economies.”
Some officials, especially in Latin America, remained optimistic that the effects of tapering monetary easing by the Federal Reserve, which is now a matter of “when” rather than “if,” would not be that bad after all.
“What might have happened regarding emerging markets is that we might have had a bit of an excess of optimism and now we see …the actual situation is rather in between,” Luiz Awazu Pereira, International affairs secretary at the Brazilian central bank, said.
The spillover might even bring some benefits. “Brazil has an industry and a service sector that are quite diversified. With a more favourable exchange rate, it is going to help to recover a greater export capacity,” said Luciano Coutinho, president of the Brazilian Development Bank.
Anoop Singh, director of the IMF Asia and Pacific Department, argued that capital outflows from emerging markets in the wake of the tapering scare had been to some extent beneficial.
They had countered previous “overheating” in many of the region’s economies, which the IMF warned against in its April regional outlook, Singh said. In many countries “financial imbalances” had built up and financial policies had been “too accommodative” prior to the tapering scare, he noted.
Ilan Goldfajn, chief economist at Itau Unibanco, admitted there would be “some pain,” especially at the beginning of the adjustment. “But we must not forget [emerging markets] will eventually enjoy gains when the world economy recovers,” he said.
The markets expect the Fed to announce it will begin scaling back its QE policy in December. But with Janet Yellen, known for her dovish stance, slated to take over from Ben Bernanke as Fed chair, hopes are high that emerging markets will get more time to get their house in order.
Mauricio Cardenas, Colombia finance minister, said that “beyond the personality [of the Fed chair], the most important is a clear path, that we can anticipate, with sound information, in order to avoid market hiccups”.
But Paul Sheard, S&P’s chief global economist, warned against holding too high hopes about Yellen’s ability to control the effects of the taper: “I don’t think anyone knows, not even top authorities in the Fed, how to manage this tapering, because we are in completely uncharted territory.”
South Africa: a land of extremes for entrepreneurs
South Africa presents both strong opportunities and barriers to success for local entrepreneurs. It is evident from the EY G20 Entrepreneurship Barometer report that South Africans embrace the culture of entrepreneurship, a very important element needed to propel it to success. However there are other equally important elements such as access to funding, support and education and training that need strengthening to truly build a thriving entrepreneurial society, writes Cheryl-Jane Kujenga, EY Strategic Growth Markets Leader, Africa.
The overall environment for South African entrepreneurs is one of relative extremes. It is relatively quick and cheap to start a new business, but getting the necessary registrations and compliance in place is difficult. Furthermore, it is expensive and onerous to hire and fire new workers. Similarly, there is a burgeoning middle class of consumers providing rich opportunities, but also a vast pool of unemployed workers, creating a sharply divided market. These extremes are observable across many aspects of the overall environment for entrepreneurs locally.
Access to funding
Seventy-nine per cent of local entrepreneurs say that access to funding is difficult for them. Added to this, many believe that funding conditions are deteriorating further, whether in terms of bank lending, angel investors or initial public offerings. More positively, though, some 69% of local entrepreneurs surveyed have seen an improvement in microfinance, while 53% also report improvements in the availability of Government funding. Both sources of funding are viewed by survey respondents as vital for accelerating growth in entrepreneurship.
Microfinance in particular is ideal for millions of poor, unskilled and unemployed South Africans who, despite their disadvantages, often have the talent to develop successful businesses. Local entrepreneurs point to microfinance as a key funding instrument for the long-term growth of entrepreneurship locally.
Merger and acquisition (M&A) deal activity in South Africa was on the rise through the early 2000s, but has slowed since the financial crisis. But the country still has a very high rate of M&A investment relative to national GDP. Similarly, while venture capital availability is better than the average for rapid-growth economies, sentiment in the survey is considerably worse than average, which impacts its performance.
Overall, South Africa has a highly mature financial sector, and many believe there is enough funding in the marketplace. However, funds are not made easily available to entrepreneurs, and much of the capital is often too expensive, which limits the growth of promising ventures. To help counter this, many entrepreneurs look to the government. When asked which form of funding could make the biggest difference in improving the long-term growth of entrepreneurship, entrepreneurs cite public aid and Government lending as a key priority. This highlights the role that the Government will need to play in supporting entrepreneurship, to complement the country’s financial services sector.
Entrepreneurship culture
South Africa’s business environment and culture raises challenges for local entrepreneurs. The country’s performance overall is weighed down by below-average scores on innovation metrics, such as the number of scientific and engineering articles published, spending on research and development (R&D) and the number of researchers in this area. Patent applications, which provide another measure of innovation activity, fell by 24% in South Africa between 2008 and 2011. This implies that South Africa’s research institutions are unlikely to produce a large number of innovations with a commercial application in the near term, a fact that undermines prospects for the country’s innovation-led start-ups.
Despite these weaknesses, South Africa’s entrepreneurs believe their culture encourages entrepreneurship: 70% of those surveyed believed this. It is possible that a high level of media attention on entrepreneurs and entrepreneurship being seen as a strong career choice, rather than academic, corporate or institutional strengths, have fuelled this impression. Still, exceptionally high proportions of local entrepreneurs indicated that various measures – from promoting their role as job creators, to getting more start-up success stories publicised – could have a strong impact on cultural perspectives of entrepreneurship.
Tax and regulation
South Africa has strong start-up and taxation compliance procedures, in contrast to other members of the so-called “BRICS club” of rapid-growth markets. In terms of tax and regulation, the country puts in a good performance against both mature and rapid-growth G20 economies. Although difficulties and bureaucracy remain, it is relatively easy, quick and cheap to start a business, and the time spent on taxes is in line with mature economies, making this a relative strength for the country’s entrepreneurial ecosystem. Nevertheless, local entrepreneurs are still keen for greater support in complying with regulations, and 42% point to the need for an agency to assist in this area.
A bigger challenge emerges when companies move beyond the start-up phase. The cost of firing workers is a notable detractor, and highlights the ongoing need for labour-law reform in the country. Out of the 144 countries tracked by the World Economic Forum, South Africa is 143rd on hiring and firing practices, 140th for flexibility of wage determination and last on the measure of cooperation in labour-employer relations.
From a regulatory perspective this is the most worrying feature of the South African economy for entrepreneurs. New businesses cannot afford to comply with these burdensome labour laws, and many businesses will remain small or fall into the informal sector to avoid them. Regulatory reforms or tax credits could relatively easily help ease hiring terms, especially for the previously unemployed or for young workers, while incentivising firms to hire more freely.
Education and training
South Africa spends more on education (as a percentage of GDP) than most G20 countries and significantly more than most other rapid-growth economies. However, South Africa’s education system is in clear need of reform, which raises difficult questions about how effectively education funding is being deployed.
The country has low tertiary education enrollment and a low proportion of the workforce educated to a degree level. This means many of the more advanced entrepreneurial ventures simply don’t have access to the skills they need to thrive. Furthermore, at a more general level, entrepreneurs clearly believe that more could be done to improve the public’s view of entrepreneurship in the country. About one in two respondents pointed to the need for more efforts to promote success stories about South Africa’s entrepreneurs, as a key measure for achieving this.
In the shorter term, though, more could be done to bolster informal learning and training schemes in order to help bridge at least some of the gap. There are encouraging signs, based on the sentiment from our survey, that the private sector is helping to pick up the slack here. For example, through stronger corporate engagement with start-ups; 62% of those polled think access to such schemes has improved in recent years, compared with 36% across the G20 overall.
Coordinated support
South Africa’s entrepreneurs report improved access to various support structures, including business incubators, mentor programmes, industry-specific training programmes, entrepreneurial workshops and corporate engagement with start-ups. All this is encouraging news, particularly in terms of business incubators, as these are considered by local entrepreneurs to be the single most important tool for strengthening the future of entrepreneurship in South Africa.
The perception of network-related elements of coordinated support, such as clubs, associations, chambers of commerce and small business administration, where only a minority of entrepreneurs noted improvements, is less encouraging.
Among G20 countries, access to educators is falling most sharply in South Africa, with 30% of respondents reporting a deterioration in the past three years. This contrasts with competing rapid-growth markets that are reporting strong improvement. Some 61% of respondents from India report an increase in access to educators, while Russia (57%), Turkey (57%) and Indonesia (55%) follow the same trend. This again highlights the need for wider educational reform, while suggesting that informal learning and mentorship opportunities will remain vital in the years ahead.
Of the G20, South Africa does seem significantly more enthusiastic about tailored support for female entrepreneurs. As far back as 1998, for example, the Government set up the Technology for Women in Business initiative to help empower women within the technology sector. This shows recognition of the value of more targeted entrepreneurial support.
This article is an extract from the ‘EY G20 Entrepreneurship Barometer 2013 Country Report – South Africa’. Download the full report.
GO EAST, YOUNG MAN
VIETNAM’S BOOMING ECONOMY OFFERS PLENTY OF OPPORTUNITY—IF YOU CAN NAVIGATE THE GRAFT
[By Warren Strugatch Global Trade Magazine]
BALANCING ACT With a population of 90 million and quick access to China, Vietnam is attractive for business.
Head north, and complexities mount as government favoritism proliferates.
Back in 2001, Lafarge Concrete opened its first plant, a joint venture cement-grinding facility in Ho Chi Minh City—formerly Saigon—barely a year after the U.S. and Vietnam signed their bilateral trade agreement. Like many companies, the building-materials giant saw Vietnam’s potential as an echo boom reflecting the massive construction surge occurring just across the border with China.
Lafarge soon opened a second facility, a concrete manufacturing plant, not far away. But the real action was happening up north in the capital. Hanoi was tripling in population, housing a tidal wave of new private companies whose mere existence would have alarmed the government just a few years earlier, before legal and market reform policies began transforming the country into a hybrid capitalistic-socialist state. Industrial production skyrocketed, exceeding 20 percent during the early ‘90s. PricewaterhouseCoopers, the global accounting and auditing firm, ranked Hanoi the world’s fastest-expanding city by GDP growth and Vietnam the world’s fastest-growing Emerging Market.
Lafarge, which produced and sold concrete, cement and other building products in 64 countries around the world, naturally looked north, eying expansion into the epicenter of the boom. Michael J. Duffy, a consultant and outside counsel to the company from mid-2009 through 2012, recalls routine delays at the ports, unexpected tariffs and resistance from the firm’s potential customers—general contracting firms that for the most part were state-owned or government-connected.
“What I found most striking were the market barriers that existed and grew the farther north you went,” says Duffy, a Philadelphia lawyer who spent years in Vietnam working on various long-term projects and even married a local. In Duffy’s telling, Lafarge flourished in the former Saigon, which the lawyer calls business-friendly, but struggled farther north in Danang. In Hanoi, Duffy says, the company’s expansion plan effectively stalled out and the company discontinued its efforts by mid-2010.
Why the stony reception? Duffy cites several factors. One was business climate: the country’s northern half being a government-dominated region where state-owned enterprises proliferate. Another was cultural, reflecting widespread preference for government-approved companies—those officially recognized as well as those simply known to be in favor. A foreign company hoping to do business in the north, Duffy contends, better arrive brandishing government connections or face the consequences.
“Personal relationships and benefits were often vital to allowing a business to succeed,” says Duffy. “Other companies would not do business with a non-connected outsider.”
A country no larger than New Mexico populated by 90 million, Vietnam has long been both paradox and priority for the United States. The two nations have engaged in a drawn-out and oftentimes acrimonious relationship, characterized by epic cultural misunderstandings and enduring political disputes. After spending the 1960s locked in a bloody conflict known as the “Vietnam War” in America and the “American War” in Vietnam, both sides signed a peace treaty in 1972; the U.S.’s disengagement was followed by the North’s military victory three years later, resulting in unification under communist rule. Fifteen years later, the countries reestablished diplomatic relations after a lengthy U.S.-led trade embargo; three decades later, officials from both governments reassembled to sign the trade agreement credited—at least in the U.S.—with triggering the country’s rapid industrialization and access to middle-class goods and services.
Now, after decades of military battle, economic boycotts, rhetorical saber-rattling and diplomatic maneuvering, mutual pursuit of trade opportunities is bringing the two countries closer than they’ve ever been. Which is not to say that the road ahead is smoothly paved.
“The Vietnam market represents the next great opportunity for all types of American companies,” declares an exporter’s advisory posted on the Department of Commerce’s Export.gov website. After extolling the country, the document abruptly alarms: “Corruption is a fact of life at many levels of Vietnamese governmental bodies and business. You must learn in advance how to deal with it and how to avoid getting caught in the crossfire of competing demands.” It concludes with the warning, “Persons convicted of corruption are now being sentenced to death or to long prison terms.”
THE AMERICAN WAR It took more than two decades following the Vietnam War—or “American War” to Vietnamese—for the two nations to reestablish economic ties.
The country’s economic boom, solid infrastructure, friendly people and relatively easy access to other Asian economies fan interest in Vietnam among trade-minded business owners and executives around the world; its unreliable transparency, government unpredictability, and stultifying, corrupt bureaucracy pace international concerns. U.S. exporters and multinationals—the new kids on the block—realize soon enough that while opportunities abound, the playing field is hardly level; those who don’t get that do not last long. Competition from well-entrenched and government-favored companies from China, Japan, Indonesia, Korea and Singapore is intense. And concern about counterfeiters operating with impunity is high.
“Companies have invested a great deal in marketing products to the Vietnamese marketplace, only to have that investment undermined by local production of counterfeit goods,” says lawyer Duffy. “Just as often, a company will invest in developing their brand, only to have a local company produce goods that, while not identical, have a name and style similar enough to confuse consumers into mistakenly purchasing them.”
Still, the influx continues. Vietnam is the U.S.’s 23rd-largest trading partner, shipping $20.3 billion in goods to this country in 2012, a 19 percent rise over the previous year. Vietnam absorbed about $4.6 billion of U.S. products last year, representing a 38 percent increase over the prior year—but still generating a $15.7 billion imbalance. The long-running deficit is often attributed to what’s known as “soft protectionism”—a hard-to-trace blend of official sluggishness, bureaucratic inertia and signaling government preferences to intimidated business owners. Trade advocates expect the situation to change; the office of the U.S. Trade Representative has placed Vietnam on the Special 301 Watch List. Privately, officials say Vietnamese leaders understand that the barriers—informal or otherwise—must come down for the country to fully participate in the global economy.
Leading sectors for U.S. export and investment include power generation, transmission and distribution; agriculture; telecommunications equipment and services; oil and gas machinery and services; computer hardware and software; airport equipment; environmental products; and medical equipment.
As for foreign direct investment (FDI) opportunities, American interests are clamoring for position amid tough competition in a tightly controlled market. Vietnam has attracted more than $210.5 billion from foreign companies and investors over the past decade, funding primarily new factories and processing plants, much of it in the power-generation sector. Real estate deals come in a distant second.
Last year’s FDI rose 4.7 percent to $16.3 billion, according to Vietnam’s Foreign Investment Agency. Nearly 1,300 new foreign-invested projects were granted licenses with total registered capital of $8.6 billion.
Despite surging commercial interest in Vietnam, U.S. entities were cleared to invest less than $1 billion last year. The amount pales in comparison with the $13 billion spent by Japan. Right behind Japan came Taiwan, Singapore and South Korea. The United States came in behind—you better sit down—Samoa and the British Virgin Islands.
As costs of doing business in China continue to rise, multinational executives scan the horizon for what’s known in managerial shorthand as “the next China,” meaning a country able to meet demanding international manufacturing, sourcing and distribution standards, assure safety and reliability, and deliver all of the above on a fee scale well under what Chinese workers now command.
“For companies that focus on logistics, Vietnam may be the next China,” says Page Siplon, executive director of the Georgia Center of Innovation for Logistics. Siplon cites as partial evidence recent container traffic volume: Vietnam’s is up, China’s is flat.
“The environment is changing fast,” he says. “The days when you needed a man with a gun guarding the door are over.”
The country’s many advantageous attributes and appealing features have turned people like Jim Angleton into unabashed Vietnam cheerleaders. Angleton, president of Miami-based AEGIS FinServ Corp., a business debit card provider, scuttled around Southeast Asia three years ago scouting locations for an Asian base before settling on Vietnam. Says Angleton: “After exhaustive travels and in-depth research, we decided to establish offices for our debit card division in Saigon,” referring to the city renamed for Ho Chi Minh after the war and which many Westerners and some Vietnamese still call Saigon. During his searches Angleton ruled out Hong Kong, he says, citing “seriously high levels of corporate espionage and lack of respect for trademark rights” and intellectual property in general. As for Singapore, he relished the archipelago’s culture and natural beauty but cringed at the cost.
So, it was off to Vietnam.
“We concentrated our relocation of existing staff to Vietnam and were pleasantly surprised to learn that many ex-pats live there,” he says. “We have been fortunate enough to hire from their highly experienced workforce.”
When he speaks with fellow C-suiters, Angleton is not shy about extolling the country that has welcomed him. “I’ve told about 40 other executives: Don’t go to Hong Kong. Don’t go to Indonesia. Come to Vietnam.”
Why Emerging Markets Don’t Need Elon Musk
by Bryan Mezue | HBR.org
As BRICS crash,
Emerging Europe Is a Haven in Selloff
Over the last year, we at Fluent In Foreign Business called for investors, exporters and franchisors to look Beyond The BRICS when considering foreign expansion into emerging markets. Now, it seems the financial markets more than validated our hypothesis and the recent melt down of the BRICS and Turkish stocks and currencies in the face of the slowed growth and looming Syrian conflict, cast a dark shadow on the entire emerging markets sector.
Yet throwing out the baby with the bath water is not wise. As the article below illustrates, a number of smaller markets in Central Europe offer fantastic opportunities as they are coming out of their recessionary years. Numerous African markets also exhibit fantastic growth and offer very solid short and medium-term opportunities. Companies seeking to learn about specific countries and their attractiveness as foreign expansion prospects, should consult Fi180 Country profiles with their FI3 Indices™ that are available for 180 countries including all of the emerging markets.
Investors Turn to Central, Eastern Europe
Propelled by the euro zone’s recovery, Europe’s emerging markets are rising above the storm that has hit other developing economies.
Stock markets in Central and Eastern Europe are up 1.2% in the past three months, compared with a 7.5% drop in emerging markets overall, according to index provider MSCI. These markets have risen 2.3% when Russian companies, which have been hard hit by falling commodity prices, are excluded.
Bloomberg NewsThe Czech economy pulled out of an 18-month recession in the second quarter. Here, a jewelry store in Prague this past January.
Currencies such as Poland’s zloty and the Bulgarian lev also are up against the dollar since May, while India’s rupee and Turkey’s lira have slid to record lows.
Faced with losses in some Asian and South American emerging markets, money managers are scooping up assets such as the Hungarian forint and Czech bank stocks. They are betting that Western Europe’s return to growth after a year-and-a-half-long recession will fuel demand for cars, appliances and other goods manufactured in Eastern Europe.
“Central and Eastern Europe has become a relative safe haven within emerging markets,” said Javier Corominas, head of economic research and currency strategy at Record Currency Management Ltd., which manages about $36 billion. Record Currency Management bought Hungarian forint and Polish zloty in the second quarter, Mr. Corominas said.
Mr. Corominas pointed to Hungary’s current-account surplus, in which exports outpace imports, as a reason to buy the forint. Many of the hardest hit countries in the emerging-market selloff, including Turkey and India, run big trade deficits and rely on foreign investment to cover the gap. With the Federal Reserve preparing to wind down policies that flooded financial markets with cheap cash, investors are questioning how those countries will pay for imports and finance debt.
To be sure, even though the euro zone appears to be coming out of its longest recession since World War II, growth both in the region and right outside it remains slow and unemployment high. The Organization for Economic Cooperation and Development expects Poland’s economy to expand by just 0.9% this year.
Central and Eastern Europe’s economy may not be healthy enough to keep investors from fleeing, particularly if the Fed tightens monetary policy. The possibility of another flare-up in the euro zone’s debt crisis could also destabilize emerging markets in the region.
“We would prefer to play Europe from the other side of the Continent, from the U.K. and Norway,” said Paul Christopher, chief international strategist at Wells Fargo Advisor, which has $1.3 trillion under management. “Emerging markets in general are vulnerable…to what the Fed does.”
Still, exports are bolstering Europe’s emerging markets. Hungary ran a trade surplus of €3.68 billion ($4.92 billion) in the first half, according to the country’s statistics agency, compared with a €3.62 billion surplus in the year-ago period. Poland reported a surplus of €574 million in June, compared with a deficit of €1.09 billion a year earlier, according to the Polish central bank. As countries such as France and Germany import more goods, their emerging-market neighbors will see their trade balance tilt even more in their favor, analysts said.
Kjetil Birkeland, senior analyst at Standish, a subsidiary of the Bank of New York Mellon Corp., said his fund, which manages $15 billion in emerging-market debt, bought Polish zloty in the past six months. Mr. Birkeland said he expects the zloty to get a lift as Germany buys more Polish goods.
Data released on Monday showed Poland’s retail sales for July rose 4.3% from the same month last year, surpassing expectations for 2.8% growth, while unemployment eased to 13.1%. The Czech economy recovered from an 18-month recession when its gross domestic product expanded 0.7% in April to June from the previous quarter.
Morgan Harting, portfolio manager at AllianceBernstein LP, which manages $444 billion, this year boosted the fund manager’s exposure to Czech banks, which would generate more business as the economy expands. “You think about the Czech Republic economy improving as its neighborhood gets better,” Mr. Harting said.
Central and Eastern European share prices also are low relative to corporate profits, creating opportunities for bargain hunters, investors said. Stocks are down 34% from their 2011 peak, according to MSCI.
Since early May, investors have put about a net $230 million into funds that mainly buy Polish stocks, according to data provider EPFR Global. In comparison, investors pulled a combined $930 million from stocks in Europe, the Middle East and Africa in the same period.
“[Emerging European economies] weren’t big beneficiaries of [the Fed’s bond buying], so it’s no surprise they’ve been hit less hard,” said Neil Shearing, chief emerging-market economist at Capital Economics in London.
—Erin McCarthy contributed to this article.Write to Clare Connaghan at clare.connaghan@dowjones.com
The U.S. Strike on Emerging Markets
Developing Countries Were Rattled by the Prospect of War in 2002, but the World Has Changed for the Worse Since Then
By LIAM DENNING, WSJ.com
A looming war in the Middle East, the lingering legacy of a recent U.S. recession, and very low interest rates suggesting the next move must be upward.
Summer 2013, yes, but also summer 2002. For emerging markets, the outlook is darker this time.
Emerging markets have been melting in the summer heat. This week, with the Indian rupee and Turkish lira hitting record lows against the U.S. dollar, the focal point is expected U.S. military action in Syria.
By injecting fear into oil markets, Syria does exacerbate a problem facing several emerging markets: energy costs. Priced in dollars, Brent crude is still 22% below its 2008 peak. But in rupees, for example, it is around 25% above the 2008 high point. Higher energy import bills widen current-account deficits menacing several emerging markets. Meanwhile, the threat of war encourages foreign investors to withdraw to safe harbors, draining away the portfolio flows required to plug the gap.
The real threats to emerging markets, though, lie not in Damascus but in Washington and at home.
The MSCI Emerging Markets index underwent an initial correction of 12% in the month following U.S. Federal Reserve Chairman Ben Bernanke‘s indication on May 22 that the central bank could start scaling back its bond buys in September.
Foreign capital that helped plug current-account deficits in several emerging markets is being called home by the prospect of higher rates. Some $23 billion has flowed out of emerging-markets bonds since May 22, not too far short of the $30 billion that had flowed in since mid-2012, according to Barclays. This, in turn, raises local funding costs and stokes inflation via falling exchange rates.
Back in 2002, rumblings of a much bigger U.S.-led war were in the air and the federal-funds target rate, at 1.75%, didn’t look like it could go much lower. Emerging stock markets were selling off, centered on worries about South America.
As it turned out, though, the MSCI index bottomed in October of that year. The Fed actually did go lower: The target rate was cut to 1.25% in November and to 1% in June 2003. Despite the Iraq War kicking off in March 2003, emerging markets began a spectacular bull run, quadrupling by October 2007—even as oil prices surged and the Fed pushed the target rate back up to 5.25%.
Despite the echoes with that similarly fevered time a decade or so ago, the world has changed. For one, the commodities boom that boosted large emerging markets such as Russia and Brazil has petered out. Even if oil spikes on Syrian conflict, the experience of recent years indicates this will undermine demand, either by crimping economic growth or accelerating the drive toward greater fuel efficiency or oil substitution.
Beneath this lies a more fundamental change. In 2002, investors could look forward to a five-year period in which emerging markets’ economic growth averaged five percentage points more a year than developed markets. Today, looking ahead five years using International Monetary Fund estimates, the gap looks set to have shrunk to 3.5 percentage points.
What has changed is that, following the financial crisis, the developed world’s ability to suck in imports from emerging markets, funded by credit, is greatly diminished. Rising U.S. interest rates will serve to keep a lid on that.
Without that tailwind, the structural challenges facing emerging markets are resurfacing, such as India’s barriers to investment and Brazil’s inadequate investment in infrastructure. The confused policy response to recent pressure on currencies, be it India’s imposition of capital controls or Turkey’s convoluted interest-rate corridor, heightens the sense that emerging markets are struggling in this new environment.
Barclays points out that while emerging-market sovereign yields fell during the last Fed-tightening cycle, as the next one looms, they have risen by around a percentage point on average already.
Syria adds to the pain, but emerging markets are fighting a different war already.
Write to Liam Denning at liam.denning@wsj.com
America’s Africa Opportunity
It would be easy to describe President Obama’s trip to Africa earlier this summer as a triumph of symbolism over substance. Much of the news reporting supported this impression, focusing on stage-managed photo ops—in Nelson Mandela‘s former prison cell, for example—rather than the big picture.
Beyond the cameras’ view, however, a very important story has been unfolding in the world’s second most-populous continent: that of sweeping economic change and the opportunities these changes have created for American businesses and the U.S. economy.
The future success of the U.S. economy depends on the growth of our private sector: what we call the “growth imperative.”
Only growth can generate the jobs and tax revenues the United States needs and the higher living standards Americans have come to expect. And while the developing markets of China, India, Southeast Asia and Latin America certainly provide significant growth opportunities, Africa can no longer be discounted or ignored, as it has in the past, especially with the BRIC economies (Brazil, Russia, India and China) slowing down.
Indeed, both demographics and economics point to Africa as one of the few bright spots in the global economy. For companies, this means Africa could become a major market, rather than a “nice to have” side market.
Hyundai has made such a calculation and it’s paying off. Once nearly absent from the African market, Hyundai is investing millions in an effort to become the leading auto brand on the continent. It has already surpassed Toyota in sales in five countries—Algeria, Angola, Egypt, Morocco and South Africa—representing 70 percent of the African market. This should serve as a lesson for U.S. companies.
What’s changed in Africa?
For one thing, more than half of all African countries are now working democracies. This has increased transparency, reduced corruption, and improved property-rights protections and the rule of law. Even so, the Wall Street Journal’s 2013 “Index of Economic Freedom” ranks the economies of only eight North African countries as moderately free to free, while only nine sub-Saharan countries fall in this range. Competing in Africa is not without significant risks.
Freedom and stability are critical, of course. As President Obama told an audience at the University of Cape Town during his visit, U.S. businesses are “interested in investing not in strongmen, but in strong institutions.”
With this transition to more open and accountable societies—a work in progress, to be sure—comes increased prosperity. Admittedly, many African countries start from a very low baseline. Be that as it may, however, nearly half of the twenty countries with the strongest economic growth rates in 2012 were in Africa. Sierra Leone, for example, grew by an extraordinary 21 percent last year.
The rapid growth continues, and appears to be spreading, with as many as a dozen African economies expected to grow in double digits again this year.
This, in turn, has produced a growing middle class, projected to increase from 172 million in 2011 to 233 million by 2017. It also has encouraged private investment, with private sector investment in infrastructure alone up 85 percent from the early 1990s.
While rich in oil and minerals and other natural resources, Africa’s greatest resource is its human capital. Africa has a population of more than 1.1 billion—not much smaller than China’s (1.3 billion) or India’s (1.2 billion). While this is a compelling number, forward-looking businesses also need to take note of the fact that more than 60 percent of Africa’s population is under 35 years of age.
These are workers and consumers. My firm’s research indicates that African consumers highly value American products and are among the most brand-loyal customers anywhere in the world. If you win them over today, they might stay with you for life.
The challenges are great to be sure. The African continent’s 1.1 billion residents speak more than 2,100 languages, and reside in fifty-four countries in an area larger than China, India, the United States and Europe combined. Yet we estimate that by the year 2020 the African market will be worth well over $1 trillion. That’s a market well worth pursuing.
David Michael is a San Francisco-based senior partner of The Boston Consulting Group (BCG), leader of the firm’s “Global Advantage” practice, and co-author of The $10 Trillion Prize: Captivating the Newly Affluent in China and India.
Venture Interest in Emerging Markets Investing Wanes
Japan, Israel and the United States were the big winners in this year’s Global Venture Capital Confidence Survey. Brazil and China were the big losers.
The survey measures investment sentiment around the globe and this year 403 general partners were interviewed, largely from venture firms but also from growth and private equity outfits. A total of 65% of the GPs came from outside the United States, according to the survey, which was sponsored by Deloitte and the National Venture Capital Association.
The survey uncovered cooling attitudes toward investing in emerging markets.
Brazil and China both saw 6% declines in overall investment sentiment, though confidence levels remain relatively high at 3.33 and 3.26, respectively. Confidence is measured on a scale of 1 to 5, with 5 being the highest.
India also saw a decline.
Japan saw the largest increase in confidence, but remains at a modest overall confidence level of 2.74. The United States witnessed a 4% increase in investor interest with the highest confidence level of any country at 3.79, the survey found.
Interest in Israel increased 6% to a confidence level of 3.55, and Germany was up 2% to a confidence level of 2.97.
Looking for Bargains in Emerging Markets
Emerging markets might look bleak, but investors willing to focus on specific sectors are finding a much brighter picture
By MURRAY COLEMAN. The Wall Street Journal
Investors are used to lumping emerging-market stocks together. But bargains are easier to find in specific sectors, financial advisers say.
This year through July, the MSCI Emerging Markets index has fallen nearly 9%. A few key culprits are at the heart of the drubbing.
Nearly 10% of the index is composed of materials stocks, for example, which so far this year have lost about 20%. Energy companies, which represent about 12% of the index, have lost more than 14%.
Without those sectors, the broad MSCI index would be down by less than 5% in 2013, estimates investment adviser Leuthold Group in Minneapolis.
Larger emerging-market countries “are major exporters of commodities and raw materials,” says Peter Lannigan, head of emerging-markets strategy at broker-dealer CRT Capital Group in Stamford, Conn. “But people are missing the bigger picture if they don’t look at other drivers of long-term growth.”
Some of the cheapest stocks can be found in cyclical sectors, such as technology, financials and consumer discretionary, says Paul Christopher, chief international strategist at Wells Fargo Advisors, which manages about $1.3 trillion.
“Cyclical stocks seem well-positioned to outperform in emerging markets over the next 12 months,” he says.
Consider emerging-market technology stocks, which are down about 2% this year. As of July 31, the MSCI Emerging Markets index had a price/earnings ratio of 9.6, based on the next 12 months’ estimated earnings, compared with its 10-year average P/E of 10.8, according to MSCI.
But tech stocks traded at an even steeper discount, with a forward P/E of 9.7, below their 10-year average of 14.1.
“Investors with a longer-term focus might want to consider diversifying their U.S. technology exposure on a more global level,” says Michael Yoshikami, chief executive at Destination Wealth Management in Walnut Creek, Calif., with $1.3 billion in assets.
Tech stocks make up about 15% of the iShares Core MSCI Emerging MarketsIEMG +0.28% exchange-traded fund, which has an expense ratio of 0.18%, or $18 per $10,000 invested.
Financial companies, which account for more than 27% of the MSCI Emerging Markets index, have slid 8% so far this year and now trade at a forward P/E of 8.6, below the sector’s 11.7 10-year average, according to MSCI.
High on Mr. Yoshikami’s watch list is the EGShares Technology GEMSQGEM -2.51% ETF, which invests in emerging-market tech companies and charges expenses of 0.85%. The dividend-focused WisdomTree Emerging Markets Equity Income Fund, DEM +0.56% which costs 0.63%, includes a heavy weighting in financial stocks.
Some portfolio managers see opportunities in companies focused on the rising middle class. For example, emerging-market health-care stocks, which make up less than 2% of the overall market, have risen around 6% this year.
Prices in the sector are still more modest than those of many U.S.-based companies, says Jeff Shen, head of BlackRock‘s BLK +0.74% emerging-markets group, which oversees some $250 billion.
“Health care is going to play an even bigger part in lifting the living standards in developing countries over the next several years,” he says.
ETFs that invest more heavily in emerging-market health-care companies tend to be small and trade infrequently, but some actively managed mutual funds carry significant weights in the sector. For example, the Matthews Asia Growth Fund, which costs 1.16%, has about 9% of its portfolio in health-care stocks.
Another opportunity might be consumer-related companies, which have only lost 2.5% in 2013.
Though such companies are pricier, with staples trading at a forward P/E of 21.3, emerging markets’ expanding middle class should provide more upside for the sector, says Robert Lutts, chief investment officer at Cabot Money Management in Salem, Mass., which oversees $500 million. The EGShares Emerging Markets ConsumerECON +0.53% ETF, which Mr. Lutts uses, has an expense ratio of 0.85%.
“Since emerging markets are so volatile, we’ve found that watching what we own in different sectors can really limit downside risks,” Mr. Lutts says.
He also uses several other sector, country and regional ETFs to more finely slice emerging markets to his firm’s own preferences.
For example, to tap into demand for Brazil’s local goods and services, he favors theGlobal X Brazil Consumer BRAQ +1.57% ETF.
“It just doesn’t make sense anymore to lump every type of country and industry together in the same portfolio,” he says. “It pays to be more selective.”
How did Estonia become a leader in technology?
WHEN Estonia regained its independence in 1991, after the collapse of the Soviet Union, less than half its population had a telephone line and its only independent link to the outside world was a Finnish mobile phone concealed in the foreign minister’s garden. Two decades later, it is a world leader in technology. Estonian geeks developed the code behind Skype, Hotmail and Kazaa (an early file-sharing network). In 2007 it became the first country to allow online voting in a general election. It has among the world’s zippiest broadband speeds and holds the record for start-ups per person. Its 1.3m citizens pay for parking spaces with their mobile phones and have their health records stored in the digital cloud. Filing an annual tax return online, as 95% of Estonians do, takes about five minutes. How did the smallest Baltic state develop such a strong tech culture?
The foundation was laid in 1992 when Mart Laar, Estonia’s prime minister at the time,defibrillated the flat-lining economy. In less than two years his young government (average age: 35) gave Estonia a flat income-tax, free trade, sound money and privatisation. New businesses could be registered smoothly and without delays, an important spur for geeks lying in wait. Feeble infrastructure, a legacy of the Soviet era, meant that the political class began with a clean sheet. When Finland decided to upgrade to digital phone connections, it offered its archaic 1970s analogue telephone-exchange to Estonia for free. Estonia declined the proposal and built a digital system of its own. Similarly, the country went from having no land registry to creating a paperless one. “We just skipped certain things…Mosaic [the first popular web browser] had just come out and everyone was on a level playing field,” recalls Toomas Hendrik Ilves, the president. Not saddled with legacy technology, the country’s young ministers put their faith in the internet.
A nationwide project to equip classrooms with computers followed and by 1998 all schools were online. In 2000, when the government declared internet access to be a human right, the web spread into the boondocks. Free Wi-Fi became commonplace. Rubber stamps, carbon paper and long queues gave way to “e-government”. The private sector followed: the sale of Skype to eBay in 2005, for $2.6 billion, created a new class of Estonian investors, who made tens of millions of euros from their shareholdings—and have been putting their experience, and their windfalls, to good use. Today Tehnopol, a business hub in Tallinn, the perky capital, houses more than 150 tech companies. Given the country’s tiny domestic market, start-ups have been forced to think global, says Taavet Hinrikus, Skype’s first employee and co-founder of TransferWise, a peer-to-peer money-transfer service whose customers are spread across Europe and America. According to the World Bank, over 14,000 new companies registered in Estonia in 2011, 40% more than during the same period in 2008. High-tech industries now account for about 15% of GDP.
How can other countries—that lack Estonia’s small size and its clean sheet—follow its example? “It’s sort of obnoxious to say, ‘Do what we did’,” says Mr Ilves. But he submits that Estonia’s success is not so much about ditching legacy technology as it is about shedding “legacy thinking”. Replicating a paper-based tax-filing procedure on a computer, for instance, is no good; having such forms pre-filled so that the taxpayer has only to check the calculations has made the system a success. Education is important, too: last year, in a public-private partnership, a programme called ProgeTiiger (“Programming Tiger”) was announced, to teach five-year-olds the basics of coding. “In the 80s every boy in high-school wanted to be a rock star,” says Mr Hinrikus. “Now everybody in high-school wants to be an entrepreneur.”
The region was able to sustain an average GDP growth rate of 4 percent from 2003 to 2012 and increase its share of global FDI, reaching record highs of 6.7 percent FDI growth in 2012.
Trinidad and Tobago’s stable macroeconomic performance, and proximity and trade ties with its Caribbean and Latin American neighbours, make it an ideal investment location.
Here are some of the more lucrative opportunities:
1. Downstream Energy
T&T is an minor oil producer on the global market, but a major player in downstream manufacturing. It is the largest global producer of methanol and ammonia, two important products of natural gas.
With contracting markets the new normal, the Ministry of Energy and Energy Affair is looking at new ways to use hydrocarbon reserves.
Melamine moulding production, downstream from ammonia production, is a niche manufacturing business that has not yet been commercially explored in T&T.
The National Energy Corporation of Trinidad and Tobago needs partners to exploit this business and begin producing and exporting high-demand melamine derivatives like dinnerware, adhesives, laminates and coatings. These products pair well with product manufacturing for the agricultural, construction, electronics and automotive industries.
2. Data Centers and BPO
Large-scale data centers rely on sites being energy-efficient and Trinidad and Tobago punches above its weight here, with some of the lowest rates across Latin America and the Caribbean.
Investors can expect attractive incentives and solid infrastructure at the Tamana Intech Park, a government-initiated, light eco-industrial park dedicated to high-value manufacture, ICT and agro-industrial uses. Over 20 lots with full access to utilities are available to investors. Special tax exemptions apply.
If you’re looking for an independent review of T&T’s BPO investment potential you’re in luck. With a capable and educated workforce and solid infrastructure, the country is right for data creation and service-based industries like telemarketing, contact centres and help-desks.
Experts estimate that based on the rate of university graduates in sectors like engineering, ICT, and business management, the country can provide an employee base of 5,000 to 6,000 for BPOs.
3. Tourism
Hotels and attractions are the mainstay of this sector, but global trends in tourism FDI show that there may be an unmet need for investment in high-profile activities like touring.
Trinidad and Tobago revised its Tourism Development Act to provide attractive tax benefits to owners/operators of approved tourism projects.
There is room for investment in three large-scale hotel development schemes. One is already operational: the five-star Magdalena Grand in Tobago is a 200-room beachfront property with an 18-hole golf course and a spa.
There’s also Rocky Point, Tobago. It’s ripe for a 200-room luxury resort on two adjoining parcels of land in an unexploited part of an island that already commands a strong reputation as a tourist destination for Europeans . Value of investment? It’s estimated at around US$124 million.
On the sister isle, Chaguaramas is teeming with potential as a yachting hub and eco-tourism site. Over 1,000 vessels came in 2012 to take advantage of T&T’s location below the hurricane belt.
With its historical landmarks and rainforest, the area is set to become even more popular once plans for a hotel, marina and golf course come to fruition.
4. Agribusiness
T&T spends roughly US$4 billion annually on imported food, and securing reliable, local food supplies is now a public sector priority.
Fortunately, both Trinidad and Tobago are rich in arable land, and have warm climates, so it’s easy to capture market share in agribusiness.
The Ministry of Food Production, Land and Marine Affairs has produced a good guide to agriculture and agribusiness investment; there are opportunities for investment in cocoa and honey, staples like rice and sweet potato; fruits, vegetable and livestock.
While the government is focused primarily on producing food for its large middle class, investors can target the almost 600 million people living next door.
5. Film & Animation
These creative industries look particularly promising for financiers. The islands have hosted strong animation andfilm festivals for several years, enough to drum up investment interest.
The Trinidad and Tobago Film Company offers exciting rebate incentives to small to medium-sized filmmakers; Home Again is a recent success story for the sector.
In animation, there is an opportunity for investors to partner with the T&T government on a 50 to 60-seater animation studio. At next week’s Caribbean Investment Forum (CIF) 2013, will hear how one animation project—launched after CIF 2012—is taking shape. And with creative expressions like the explosive pre-Lenten Carnival, T&T culture is rich in powerful story material. Investors stand to see huge ROI given the growing value of this business globally.
Google to Fund, Develop Wireless Networks in Emerging Markets
Google Inc. is working to build and help run wireless networks in emerging markets such as sub-Saharan Africa and Southeast Asia, connecting a billion or more new people to the Internet. WSJ’s Amir Efrati reports. (Photo: Getty Images)
Google Inc. GOOG -1.07% is deep into a multipronged effort to build and help run wireless networks in emerging markets as part of a plan to connect a billion or more new people to the Internet.
These wireless networks would serve areas such as sub-Saharan Africa and Southeast Asia to dwellers outside of major cities where wired Internet connections aren’t available, said people familiar with the strategy.
The networks also could be used to improve Internet speeds in urban centers, these people said.
Google plans to team up with local telecommunications firms and equipment providers in the emerging markets to develop the networks, as well as create business models to support them, these people said. It is unclear whether Google already has lined up such deals or alliances.
A Google spokeswoman declined to comment.
In some cases, Google aims to use airwaves reserved for television broadcasts, but only if government regulators allowed it, these people said.
The company has begun talking to regulators in countries such as South Africa and Kenya about changing current rules to allow such networks to be built en masse. Some wireless executives say they expect such changes to happen in the coming years.
As part of the plan, Google has been working on building an ecosystem of new microprocessors and low-cost smartphones powered by its Android mobile operating system to connect to the wireless networks, these people said. And the Internet search giant has worked on making special balloons or blimps, known as high-altitude platforms, to transmit signals to an area of hundreds of square miles, though such a network would involve frequencies other than the TV broadcast ones.
Google has also considered helping to create a satellite-based network, some of these people said.
“There’s not going to be one technology that will be the silver bullet,” meaning that each market will require a unique solution, said one person familiar with Google’s plans.
The activities underscore how the Web search giant is increasingly aiming to have control over every aspect of a person’s connection to the Web across the globe.
ReutersGoogle is deep into a multipronged effort to build and help run wireless networks in emerging markets.
The Mountain View, Calif., company now makes its own smartphones and tablets through its Motorola Mobility unit. It owns Android, the most-used mobile operating system for smartphones, and it is also preparing to sell Google Glass, a wearable device for people’s faces that it hopes will transform computing.
Connecting more people to the Web world-wide creates more potential users of its Web-search engine and other services such as YouTube and its Google Play media and app store. More than half of the world’s population doesn’t use the Web, particularly in developing nations, researchers say.
More Internet users, in turn, would drive online advertising on many of Google’s services. The company currently derives 87% of its annual $50 billion in revenue from selling online ads.
Google’s expansion can also net more data about consumer behavior, which can be used to create more personalized services and target individuals with more relevant advertising, said Narayanan Shivakumar, a former Google engineering executive. And by profiting from data it gleans from how people use a network it operates, Google could build a business more cheaply than traditional carriers do today.
Providing wireless networks would allow Google to circumvent incumbent cable companies and wireless carriers. Such companies, particularly in the U.S. and Europe, have clashed with Google, believing it is unfairly reaping profits on the back of their networks. Google has long feared such companies would make it harder for its Web services to work properly on the networks, said people with direct knowledge of the matter.
In the U.S., Google has deployed its own fiber-optic cables to wire up homes in cities in Kansas with high-speed Internet and video, and it has plans to do the same in cities in Missouri, Texas and Utah and elsewhere. Google also plans to launch powerful Wi-Fi networks in those markets that piggyback on its wired network, allowing anyone to use their mobile device to access the Web while they are in public spaces, said people familiar with the matter.
In mid-2011, Google also engaged in advanced discussions to buy rights to the airwaves, or spectrum, owned by wireless operator Clearwire Corp., CLWR 0.00%according to people with direct knowledge of the matter. The talks ended without a deal as Google pursued its blockbuster acquisition of Motorola MSI +0.57% Mobility.
And last year, Google held talks with satellite-TV provider Dish Network Corp.DISH -0.15% to partner on a new U.S. wireless service that might rival the networks of carriers such as AT&T T +0.03% and Verizon Wireless, people familiar with the matter have said.
Separately, Google also has made financial investments in Internet-access-related startups such as O3b Networks Ltd. O3b this year will launch special satellites that would broadcast signals to power new networks operated by telecom companies for remote areas of developing countries around the world.
The drive to be a vertical player starts at the top of Google. Chief Executive Larry Page for years has spearheaded secret research on alternative methods to provide more people with Internet access, and has become more active in thinking about providing wireless Internet access to consumers, said people familiar with the matter.
The initiatives have since become more serious and are being led by Google’s “access” unit, the Google X lab led by Google co-founder Sergey Brin, and Google.org, the company’s nonprofit arm, these people said.
Google sees its revenue-generating Web services as “inextricably linked to the infrastructure” of the pipes that bring the Web to people’s devices, said David Callisch, a marketing executive at Ruckus Wireless Inc., RKUS -4.78% which helps build wireless Internet networks and has worked with Google on Wi-Fi projects.
Some of Google’s steps toward giving emerging markets wireless access are public, with the company working with other organizations to convince governments in sub-Saharan Africa and Southeast Asia to change regulations to create new wireless networks using previously restricted airwaves. Google has long been involved in public trials to prove the technology—which operates at lower frequencies than some cell networks, allowing signals to be more easily transmitted through buildings and other obstacles and across longer distances—can work.
Google and Microsoft Corp., MSFT +0.35% normally archrivals, have cooperated to bring government leaders and wireless-industry entrepreneurs together to consider ways to open up the broadcast airwaves for public use. Next week, the companies are hosting a two-day conference in Dakar, Senegal, to discuss the issue with regulators from numerous countries.
Google has also funded and conducted several small-scale trials, many of them public, involving wireless networks that use TV broadcast airwaves in the U.S. and beyond. Microsoft, which has its own Web services such as Bing search and Skype video chat, also is conducting such trials in Africa.
One of Google’s trials is in Cape Town, South Africa, involving a “base station” that broadcasts the signals with a range of several miles, and wireless access points, or small boxes that receive the signals.
The access points, made by a California company called Carlson Wireless Technologies Inc., are located at 10 elementary schools and high schools and allow thousands of students to receive high-speed Internet access via Ethernet cables or Wi-Fi routers. The system is controlled by Google software that automatically recognizes which TV broadcast airwaves in the area aren’t being used at a given moment and can be used for the network.
Arno Hart, who manages the trial on behalf of the Tertiary Education and Research Network of South Africa, which operates wired Internet services for educational institutions, said it began in February and has “gone really, really well.”
In a blog post last year announcing the trial, Google said the technology was “well-suited to provide low cost connectivity to rural communities with poor telecommunications infrastructure, and for expanding coverage of wireless broadband in densely populated urban areas.”
For such wireless networks, Google has publicly supported the possibility of using small, inexpensive cellular devices, called “micro cells” that would be located at the access points and would harness the TV airwaves to broadcast the equivalent of a 3G or 4G wireless signal for devices within a quarter-mile radius.
—Anton Troianovski contributed to this article.
Write to Amir Efrati at amir.efrati@wsj.com
EBay Focuses on $195 Billion Global Emerging Markets Push
By Danielle Kucera , Bloomberg
The team tasked with stepping up sales growth in Russia, Latin America and China has reached 140 employees and may increase by about 60 more people by the end of 2013, said Wendy Jones, who oversees geographic expansion and cross-border trade at San Jose, California-based EBay. The effort is “incredibly well-funded” and plans to focus first on Russia, she said.
The EBay Inc. logo is displayed at the entrance to the company’s headquarters in San Jose. EBay is reaching into developing countries as the company competes with Amazon.com for the loyalty of merchants selling on its online store. Photographer: David Paul
Morris/BloombergEBay Chief Executive Officer John Donahoe is betting on regions of the world where consumers and merchants are starting buy and sell more over the Internet. The company predicts that 25 percent of its users will be in developing countries at the end of 2015, up from about 5 percent in 2012, as EBay works to narrow Amazon.com Inc.’s lead in global e-commerce.
“There is still a significant, untapped opportunity out there,” said Dan Kurnos, an analyst at Benchmark Co., who recommends buying EBay shares. “If EBay doesn’t address it, someone else will.”
EBay ended 2012 with 6 million active users in Brazil, Russia,India and China, with $3.2 billion in sales to consumers there. It had more than 112 million active users worldwide.
Language Barriers
EBay is reaching into developing countries as the company competes with Amazon (AMZN).com for the loyalty of merchants selling on its online store. Amazon is increasingly shifting to a marketplace model similar to EBay’s, with 40 percent of units on the site sold by outside vendors in the first quarter.
“We are sparing no expense,” Jones said in an interview, referring to staff dedicated to developing countries.
Donahoe’s biggest hurdle will be fostering trust in markets where fraud abounds, couriers such as FedEx Corp. (FDX) don’t exist, and most consumers don’t rely on credit cards or PayPal, instead using cash to pay for online purchases upon delivery.
“The challenges involved are significant,” said Michael DeSimone, CEO of Borderfree, which helps companies adapt e-commerce sites for new countries. “Culture is so different. Language is so different. To really do business in those countries, you need to be on the ground.”
Rapid Growth
E-commerce revenue in China, India and Latin America were estimated to exceed $185 billion in 2012, increasing at rates as fast as 44 percent a year, compared with 14 percent growth in the U.S. in the same period, according to Forrester Research. Russia’s online retail industry expanded 25 percent in 2011 to $10.5 billion, according to a report by East-West Digital News. Combined, Internet commerce in emerging regions approached the value of the U.S. market, where sales reached $231 billion in 2012.
Gaining ground abroad could help EBay close sales-growth and share-price gaps with Amazon. Shares of Seattle-based Amazon have more than tripled in the past five years, while EBay has increased 78 percent. Amazon’s sales tripled from 2008 to 2012, and EBay’s rose 65 percent.
There are reasons these emerging regions are under served. Shipping, translation, Internet search and payments all pose obstacles for companies. EBay itself closed its unprofitable Web-auction unit in China in 2006 and formed a venture with billionaire Li Ka-shing’s Tom Online Inc.
New Approach
This time, the company is trying to take a smarter approach. EBay debuted a Russian-language site earlier this year, following the release of a mobile application focused on fashion in the country in 2012. EBay saw users in Russia surge by 75 percent in 2012.
To support its efforts in Russia last year, EBay began building a team charged with forging partnerships with local companies, improving shipping times and making payments easier. The company hired Vladimir Dolgov, who most recently oversaw Google Inc.’s efforts in Russia and was previously CEO of that country’s online retailer Ozon.ru.
Dolgov’s team of less than 10 people is working to learn how to best service a country where there is no clear road map to success for non-native e-commerce sellers.
EBay focused first on smartphones and tablets, releasing its mobile application before the desktop website — an approach it may also take in Latin America, Jones said. The company is trying to reach consumers who are still in the nascent stages of online buying. While most have mobile phones, not all have laptops or desktop computers, which tend to be more expensive.
Native Content
One shortfall EBay is seeking to fill is a lack of home-grown content in emerging markets. Consumers outside the U.S. are used to to sub-par experiences because offshoots of U.S. sites tend to be badly translated, sporadically updated and prone to showing out-of-date merchandise.
Products displayed on such pages are often tailored to U.S. customer interests –- a football game on the display of a flat-screen television, for instance. This can turn off users and ruin brand trust, said Chuck Whiteman, senior vice president at MotionPoint Corp., which works with U.S. retailers to help them improve their international sites.
“It’s the world wide web — it’s a global consumer,” Whiteman said in an interview. “As soon as that consumer decides they’re in an experience that isn’t the best that company has to offer, they abandon it.”
Localizing Sites
In the summer of 2012, EBay introduced its Global Buying Hub, which focuses on localizing sites for larger markets outside the U.S., according to Sylvie de Wever, senior director of geographic expansion. Russian visitors on EBay’s site last spring saw merchandising for U.S. college basketball’s March Madness, she said.
Shipping has also long been a nightmare for retailers in new markets. Merchandise can take weeks or months to arrive because of delays when crossing country borders. Certain wildlife products -– an ostrich-skin purse with feather detailing, for example -– have to be accompanied by extra documentation. If they aren’t, they stay put in customs until the correct papers arrive.
In Russia, the delivery network is made up of local companies that service small areas within the country and are often loyal to local retailers. Theft and fraud are common, and consumers tend to pay with cash upon delivery, rather than with credit cards ahead of time.
Paying Later
“Most people think you can stick it in a FedEx box and everything will work out perfectly,” Borderfree’s DeSimone said. “It just isn’t like that.”
Jones’s team is discussing a payment-on-delivery technology that doesn’t involve cash — an attempt to stay loyal to Russian consumers, who tend to open boxes and then decide whether they’re satisfied with the products before they pay.
“If the way people shop is an environment where I physically want to see and touch and feel the goods before I pay, that’s great,” Jones said. “But we don’t necessarily want rubles handed over to a delivery person. We’re partnering with PayPal — we’re partnering with others in the market — to continue to learn and figure out how do we solve that in a uniquely EBay way.”
Because U.S. retailers have had trouble breaking into markets like Russia, the rewards of doing so at EBay are potentially that much greater. There’s latent demand for western brands, such as Michael Kors, Tory Burch and Balenciaga.
That doesn’t extend solely to luxury-fashion items. The day EBay unveiled its Russian site, the company promoted pink baseball hats featuring the New York Yankees — a brand that’s popular globally.
Local Competitors
EBay also has to deal with different search algorithms used abroad. Most U.S. companies have become accustomed to using Google’s technology to make themselves more easily findable on the Web. In Russia and China, Google isn’t the dominant search engine, with most consumers using Yandex NV’s. To learn about the nuances, EBay has begun teaming up with companies that have been in the market longer, such as Opera Software ASA (OPERA), the most popular browser in Russia with 25 percent of the market, Jones said.
There’s also the local competition. Ozon.ru describes itself as the Amazon.com of Russia, and it increased net sales by 55 percent last year, according to a statement in March. In China, EBay is going up against Alibaba Group Holding Ltd.’s Taobao, which has an estimated 90 percent share of the market, Forrester Research analyst Zia Daniell Wigder wrote in a report.
Alibaba’s billionaire founder, Jack Ma, last year said the company may go public within five years. While Alibaba already dominates in China, the company may position its initial public offering as a bet on gaining even deeper penetration in the country, according to a person familiar with the situation.
Potential Returns
Still, the potential payoff in developing regions makes the bet worthwhile for EBay. China’s online retail market is poised to reach $356.1 billion in 2016, more than tripling from $118 billion in 2011, Wigder wrote.
EBay re-entered China in November as part of partnership with luxury online seller Xiu.com. The company will probably seek additional partners as the team learns more about the market, Jones said — a similarly methodical approach to the one it’s taking in Russia.
“Will they be the only people that we potentially will work with? Probably not,” she said of Xiu.com. “We’re now in the process to start to ramp that up and spend a little bit more behind it, as we continue to learn.”
For Sale: Eastern Europe
An entire region is trying to unload everything from national railroads to postal services.
By UDAYAN GUPTA, The Wall Street Journal
Photographs (from left) by Adam Lachs/NYTimes/Redux; James Reeve/Getty Images; Darrell Gulin/Getty Images; Adam Panczuk; Getty ImagesFrom left: Manor House, Szteklin, Poland (Asking Price: $2.5 million); National Rail Freight, Bucharest, Romania (Minimum Bid: $81 million); Real-Estate Holding Firm, Warsaw, Poland (Minimum Bid: $77 million); Bridges and Toll Roads, Turkey (Minimum Bid: $3 billion); Production Studio, Warsaw, Poland (Minimum Bid: $215,000)
AS PROFESSIONAL EUROPEAN soccer teams go, GalatasarayGSRAY.IS -0.84% has had a pretty strong 2013, finishing in the top slot of its league in Turkey and competing in the prestigious European Champions League with super teams like Real Madrid and Manchester United. And the Istanbul-based team has a strong future, now that it has acquired the captain of the Dutch national soccer team.
But here’s what makes it attractive to the elite investor, who may not know the difference between a penalty kick and corner kick: The soccer team and its publicly traded marketing unit is valued at an estimated $1 billion and is considered one of the 25 richest in the world, according to a Deloitte report.
Not that long ago, few wealth managers would have considered Turkey or the rest of Central and Eastern Europe a legitimate investment opportunity. But wealthy investors think they’ve discovered a new emerging market, half a globe away from the more traditional emerging options in Brazil or Southeast Asia.
As a growing number of pros see it, the options range from traditional government bonds to sport teams and movie studios. (For its part, Galatasaray hasn’t said it wants any backers and declined requests for comment. But analysts say it’s attracting some anyway.) Late last year, the Polish government—as part of its privatization policy—auctioned off Studio Miniatur Filmowych, which specializes in producing animated films, and Studio Filmowe Kronika, a production house for documentaries. Investors could bid for 85 percent of Kronika, at the starting price of $215,000. A stake in Miniatur Filmowych, which in 2010 had revenues of $1.8 million, was even more of a bargain, analysts say. The starting price was $110,000.
Photograph by Gulfmann Collection
Look elsewhere and the price of an Eastern European movie studio is small change. In Romania, the government is selling a controlling stake in its national rail freight for $81 million. The country’s postal service is for sale, too, for $112 million. Turkey, meanwhile, would like an investor to buy more than 1,200 miles of toll roads (not to mention two enormous bridges over the Bosporus Strait). The list can seem endless because the governments in this region are on aggressive privatization plans, which include health spas, pottery manufacturers and, in Poland, even an animal-breeding station.
Sales like these are, of course, full of risks and difficulties for foreign investors. With U.S. Treasurys still hovering around 2 percent, analysts say, the willingness to take on new investments just keeps going up. “I see a pickup of interest, increased interest from family offices and fund of funds,” says Harvey Sawikin, founder and portfolio manager of Firebird Management, a New York-based fund that focuses on Eastern Europe.
“Mail a letter in Romania for 29 cents or buy the whole postal service for $112 million.”
After the fall of communism, most of the countries in Eastern Europe started from low economic bases, low gross domestic product per capita and low wage scales. It was also hammered badly during the global economic crash five years ago, which continues to make some investors jittery. But the region, with a population of several hundred million, is highly educated. Analysts also say it is highly diversified, with a domestic-demand economy and a strong exporting base. And the presence of low-cost labor makes the countries attractive manufacturing locations for companies in Western Europe.
“Just a few years ago, these countries were untouchables,” says Simon Mandel, who follows Central and Eastern European countries for Auerbach Grayson, a New York broker-dealer that specializes in emerging and frontier markets. “Weak fundamentals, inflated valuations and anemic growth rates—there wasn’t much reason to pay attention to them,” he says.
![[image]](https://i0.wp.com/si.wsj.net/public/resources/images/OB-XK767_money0_DV_20130509182831.jpg)
Photograph by Rodney SmitNot all those reasons have evaporated. While Turkey enjoyed 3 percent growth in its gross domestic product in 2012, several other countries are limping along at less than that. And those privatization plans that open up so many opportunities have generally moved along slowly. Turkey has already cut in half the amount it expects to raise from its effort.
But otherwise, most of Eastern Europe seems to be having little problem attracting capital. In January, when Poland went to raise an additional $1 billion for a 10-year 2022 bond, it was oversubscribed by nearly five times. A 750 million euro, 10-year bond issued by the Romanian government was also oversubscribed by more than four times. Hungary increased the size of its first 2013 government bond sale by more than 50 percent following strong demand from investors seeking high yields. Turkey’s stock market surged 60 percent last year.
For many, the region just seems like a better deal than Western Europe. Still gripped in various euro battles, a lot of traditional European options still scare off investors, and analysts think more companies will want to take advantage of Eastern Europe’s cheap labor. Compared to the rest of Europe, these Central and Eastern European countries have “half the debt [and] double the growth,” according to the Erste Group,EBS.VI +0.80% the Vienna-based bank that focuses on emerging markets.
Yoo: A Global Design Empire Expands
U.K.-based developer John Hitchcox has pushed his property-design and marketing company, yoo, into 26 countries, targeting label-obsessed emerging markets with a brand of subtle aesthetics
By KRISTIANO ANG, The Wall Street Journal
On a recent evening in Singapore, women in little black dresses and men in crisp suits mingled about a hotel’s rooftop bar with glasses of wine in hand. The occasion: the launch of a condominium located more than 1,000 miles away.
Philipp Engelhorn for The Wall Street Journal
Reaching Out: John Hitchcox founded yoo with French designer Philippe Starck
John Hitchcox, whose firm designed the development in the Philippines that was launched that night, has made a name for himself housing an internationally minded, design-obsessed crowd in far-flung, sometimes unlikely, destinations. In his native Britain, he is known for residences that drew the creative class to postindustrial neighborhoods on the cusp of gentrification.
When he and his partners first thought of developing lofts in London’s Bankside district in the early 1990s, it was anything but the coveted area it is today. “There was no Tube station or Tate, and the Globe was just an idea,” said Mr. Hitchcox, 51 years old.
yoo
Yoo is building an international brand of hospitality and residential properties, such as the Icon Brickell residences in Miami, shown here.
Since then, he has been continually expanding the reach of his work. His property-design and marketing company, yoo, founded in 1999 with French industrial designer Philippe Starck, has projects in 26 countries. Eight of those are in India, and this past year, he has added Peru, Azerbaijan and Boracay, a resort island in the Philippines famous for its pristine beaches. The company also has worked on the interiors of hotels in Hong Kong and Vienna.
There was a period of time where 50% of our work was in America, but we’ve gone from that to 30%,” he said. “Emerging markets are where our main activity is.”
yoo
The Barkli Virgin House condos in Moscow
To that end, yoo announced in March the creation of two hospitality brands: yoo collection, a chain of luxury hotels, and yoo 2, a series of affordably priced properties aimed at young travelers.
The first yoo-managed hotel will be the resort component of Aqua Boracay, a development that sits on a 2½-mile stretch of white beach. It is slated to open in 2014. Another 50 hospitality projects are under negotiation in locations around the world, Mr. Hitchcox said.
The company’s focus on branding is paying dividends in label-obsessed emerging markets. Mr. Hitchcox said some yoo-branded residences have sold for up to four times as much as other properties in their vicinity. On average, branded residences sell for a 31.4% premium over their nonbranded counterparts, according to a recent Knight Frank report.
yoo
A loft-style ski apartment in Niseko, Japan
“Brands have the biggest effect in emerging centers because it gives clients a degree of comfort that the offerings will be of a certain standard,” said James Price, head of international residential developments at Knight Frank.
Mr. Price said yoo faces stiff competition in the form of luxury-hotel chains like the Four Seasons, which also are expanding their residential offerings and are more widely known names. “By the bottom-line measure they’re doing well, but yoo is a bit of a niche brand,” he said. Emerging-market buyers “will respond to projects where there is a degree of familiarity with the service, such as an Asia-based hotel operator.”
Yoo has worked with celebrity decorators Jade Jagger, Marcel Wanders and Kelly Hoppen on the interiors of their branded residences and hotels, many of which are in New York, Paris and London. Some 75% of the units at Barkli Virgin House, the brick-front Moscow property Ms. Hoppen designed for yoo, sold within a week of launching last year; 50% of apartments in the first phase of development at Aqua Boracay have been snapped up before launch, said Marco Biggiogero, the property’s developer.
yoo
The Dwell 95 luxury-rental building off Wall Street in New York is shown. The company says its celebrity designers use subtle aesthetics to warm up an interior, juxtaposed with bolder elements.
The son of an architect father, Mr. Hitchcox entered the industry early in life. He was 19 years old when he developed his first property, converting a south London house into two flats. “I did the electricity and the plumbing,” he said. “I learned a lot about project management and cost overruns.”
In 1992, he co-founded Manhattan Loft Corp., a London-based company that converted abandoned factories and office buildings into lofts. The timing was apt: A report released by the Henley Centre for Forecasting at that time noted that Britons who had been fleeing to the suburbs were beginning to return to cities.
Unlike Manhattan Loft, which works directly with residents, yoo provides its developer-partners with up to four customized interior-design palettes, which typically use hues of white, taupe and beige that are occasionally juxtaposed to wilder patterns but that always aim for “warm and comfortable,” Mr. Hitchcox said. Remuneration is tied to the property’s sales, though a yoo subsidiary occasionally co-invests with developers.
An early project was 15 Broad St., the former Wall Street headquarters of J.P. Morgan JPM -0.23% in New York, which yoo took on three months after the Sept. 11 attacks. Each of the building’s 326 units comes with fittings such as maple hardwood floors, stainless-steel kitchens and lighting fixtures designed by Mr. Starck.
While some of its interior décor themes go by names such as “disco” and “techno,” the yoo aesthetic is generally subtle, with the use of materials such as unpolished Carrara marble, muted wall colorings and linen upholstery. “People think that if Marcel Wanders does it, we go all crazy with strange shapes, but the material for apartments is quite calm,” said Mark Davison, yoo’s design chief. “Homes need to be about the people living in them.”
Residents can find zany designs in the common spaces of some buildings. At Icon Brickell, a 1,800-unit residence in Miami, Fla., the 300-foot-long outdoor pool is shrouded by an orchard of trees and folded dressing screens; the building’s deck features an oversize fireplace. At Parris Landing, a Boston development in a former navy yard, giant metallic sculptures of household objects such as soap bottles are scattered about the stark white concrete atrium.
Because of yoo’s association with celebrity, Mr. Hitchcox, often photographed alongside supermodels Elle Macpherson and Caprice Bourret, is sometimes compared with another flamboyant developer, Donald Trump. For Mr. Hitchcox, the personal sometimes crosses into business. He said he began working with Jade Jagger after an introduction by his friend Mick Jagger, her rock-star father.
“My business is so big and the honest truth is that [the primary reason] I’m working with yoo is because of my friendship with John,” said Ms. Hoppen, the British decorator and reality television star, who has designed yoo homes in the U.K. and Russia.
Emerging Tech: 9 International Startup Hubs to Watch
Logitech, Rovio and Skype — these three companies produce products as mainstream as keyboards, services as cutting edge as video chatting, and games as addictive as Angry Birds. While each is different, they all began asstartups outside the U.S. and experienced the kind of success that propelled their brands across borders worldwide.
All over the globe, tech entrepreneurs are striving for similar results. But where are they starting up? Beyond London and Tel Aviv, many are gravitating to some unlikely locations to try to realize their business dreams.
Here’s a look at nine international tech startup hubs that might be under your radar. These vibrant communities are more than just places where startups set up shop. They are hotspots full of innovation and support, where inspiration and perspiration commingle as business plans are hatched, opportunities emerge, and even entire markets are being built.
Fleeing large metro areas like London and Paris, app developers and internet entrepreneurs aplenty have found a home in the Netherlands, attracted by lower taxes and living costs, and a creative lifestyle that fosters open innovation.
One example of genius generated here is Layar, the first app to put augmented reality on the map by merging smartphone cameras with location-based data. Collectives like STIKK connect local startups with a global network of entrepreneurs and founders, helping to turn local companies into international powerhouses. Nonprofit Appsterdam helps provide support and infrastructure for the burgeoning community of indie programmers.
Raring and ready to emerge, Bangalore is an energetic startup community. Driven by a well-educated population of more than 700 million people under the age of 30, Bangalore has a huge talent pool to draw from. Startups tend to focus on local problems and smaller markets, but some of their bigger successes, like social presentation service SlideShare, have made an international splash.
Starved for investors, the community bootstraps many of its startups, which only increases the pride these companies have in their performance. But look for further investment to change the landscape in India. Events like last month’s Startup Festival India have continued to raise the city’s profile, attracting talent from around the country to an event that looked every bit as fiery and polished as Big Omaha. And a group of oversees investors is launching the Kyron Accelerator, the city’s first global investment program, which aims to provide funding to 500 startups over the next five years.
With plenty of opportunities to network and a thriving Startup Weekend, Bogota is home to a growing number of tech startups south of the equator.
One big reason is ramp-up time. According to the World Bank’s Doing Business website, with much less paperwork to file, it takes less than half the time to get established in Colombia as it does other Latin American and Caribbean countries. Although this emerging market can still be a challenging place to find venture capital, its active chamber of commerce, which provides free training, and accelerators like Wayra Colombia make the city appealing to entrepreneurs.
Ireland’s former Deputy Prime Minister Mary Harney once said Dublin is spiritually closer to Boston than it is to Berlin, and as it applies to the Irish economy, that’s certainly been the case.
In an attempt to gain independence from the U.S. financial influence, the government-sponsored program Enterprise Ireland helped create 97 new businesses and 1,600 jobs in 2012. And attracted by Ireland’s 12.5 percent corporate tax rates, such internet giants as Google, Facebook, LinkedIn and Yahoo have flocked to the Irish capital, which will no doubt help other small businesses mature in their orbits.
Driven by longstanding tech meetups, the small startup scene in Lisbon is ramping up. Helping to foster local innovation, non-profit incubator Startup Lisbon was established in 2011 by the government to provide both infrastructure and services to fledgling efforts. It currently supports 42 startups, and last November, a graduating class of 13 companies emerged from the program, attracting investors from around the world.
There’s still a ways to go here, but with great weather, food and a keen interest in renewable energy — not to mention the $600 million Portugal Ventures fund that’s ready to invest — expect the startup climate to heat up further in Lisbon.
Home to hundreds of startups that have sprung up in the past few years, Nairobi is quickly becoming known as the capital of the “Silicon Savannah.” Supported by community efforts likeiHub, an open space for tech companies, hackers and investors to gather, work and learn from each other, and incubators like NaiLab, which supports 30 startups on-site and more than 100 other companies virtually, the city has the potential to create some revolutionary new services that could change not only Africa, but the world.
For example, with high rates of smartphone adoption and low 3G service costs, the country has seen one of the world’s highest rates of mobile money usage. Some 17 million Kenyans have signed up for M-PESA, a cashless currency system developed by African mobile operator Safaricom and favored by app developers. But recently, Google has waded into these waters with Beba, its NFC (near field communications) bus fare card, signaling more competition to come.
Founded by Peter the Great, Russia’s second largest city is increasingly populated by entrepreneurs taking advantage of lower startup costs than those in Moscow.
Partly due to the barriers that its language and Cyrillic alphabet create, Russia is a bit disconnected from the rest of the world’s online services, creating a world of opportunity for Saint Petersburg software and app makers. Incubator Ingria sees this, hosting 80 companies and sponsoring the Web Ready conference to spur the growth of these online startups.
Ingria is also building a technology park where startups can set up shop. Located adjacent to the Saint Petersburg State University of Telecommunications, it will surely help entrepreneurs find top-notch talent when it is completed in 2015.
While Sweden has a reputation for design savvy, it exports far more than flat-pack furniture. With tech successes like Skype and Spotify, Stockholm, the capital city, has become known as the home to the next big thing. Outside investors have taken notice to the tune of more than $500 million in foreign funding and acquisitions since 2010.
For example, industry giants Electronic Arts and Sun Microsystems snapped up Stockholm gaming company DICE and database builder MySQL, respectively. Meanwhile, startups continue to pop up, fueled with talent by the Stockholm School of Entrepreneurship, a joint effort by five local universities, and inspired by challenges like Health Hack Day, an open innovation effort aimed at solving fitness problems.
Every quarter, 100 well-connected IT executives play poker in a secret location in the city, demonstrating how hip the scene is here. Meanwhile, more than 10 million people around the world are playing Minecraft, a block-based game published by Stockholm publisher Mojang, which is already the next big thing.
Canada’s response to Silicon Valley, Toronto currently boasts more than 400 startups, according to Startup Genome.
The city draws talent and inspiration from institutions like the University of Waterloo’s Institute of Quantum Computing. What’s more, Toronto entrepreneurs benefit from well-backed programs, including the $250 million Ontario Emerging Technologies Fund, which invests in clean tech and life sciences, and the Ontario Venture Capital Fund, a $750 million chunk of private capital focused on high-growth, Ontario-based firms.
Toronto boasts a long track record for nurturing startups. Since 1997, accelerators like the wildly successful Communitech have created more than 1,000 firms, generating more than $30 billion in revenue along the way.
A new brick in the Great Wall
Additive manufacturing is growing apace in China
ALTHOUGH it is the weekend, a small factory in the Haidian district of Beijing is hard at work. Eight machines, the biggest the size of a delivery van, are busy making things. Yet the factory, owned by Beijing Longyuan Automated Fabrication System (known as AFS), appears almost deserted. This is because it is using additive-manufacturing machines, popularly known as three-dimensional (3D) printers, which run unattended day and night, seven days a week.
The printers require an occasional visit from a supervisor to top them up with the powdered materials they use as their “inks”, or to remove a completed item, but apart from that they can be left on their own. They build up the objects they are making one layer at a time, as the ink is sintered into place with a laser in a way that creates little waste and can make shapes impossible to achieve using the traditional “subtractive” technology of lathes, milling machines and cutting tools.
Western countries led the development of 3D printing, and the technique has been praised by Barack Obama as a way to revive America’s manufacturing industries. It may yet do so. But the extent to which that revival will be brought about by the return to America of production which has migrated to countries like China is harder to predict—for China has plans of its own.
Keep your powder dry
At the moment AFS is in the prototyping business. Its customers are mainly aerospace firms and vehicle-makers that need experimental designs turned into metal quickly. The powders in its machines’ hoppers are plastics, waxes and foundry sand. The results are sent off to foundries, where they are used to make moulds for the sand-casting of metal objects.
According to William Zeng, AFS’s deputy general manager, all the parts needed to make a prototype car engine can be printed and cast in this way in under two weeks. A conventional machine shop would need several months to do that—not least because many of the components would have to be made by hand.
AFS also has a second line of business. It sells the laser-sintering printers it makes to others, for this is a rapidly growing industry. And some of its machines, which cost up to 1.5m yuan (about $250,000), can do more than just sinter plastics, wax and sand; they can sinter metals directly.
Indeed, one of the country’s largest 3D printers (though it was not made by AFS) does just this. It is 12 metres long and it belongs to the National Laboratory for Aeronautics and Astronautics at Beihang University. Wang Huaming, the laboratory’s chief scientist, told a digital-manufacturing seminar organised recently by the Laboratory of High Performance Computing, a government research institute, that this behemoth is being employed to make large and complex parts for China’s commercial-aircraft programme, which plans to build planes to rival those turned out by Airbus and Boeing.
These parts include titanium fuselage frames and high-strength steel landing-gear—objects that require the metal they are made from to be free of flaws which might cause them to fail. Printing such things, rather than making them from precast metal, will be a technical tour de force, and Dr Wang’s team is therefore working on the tricky problem of controlling the recrystallisation of metals after they have been melted by the laser.
Making planes is about as high-tech as mechanical engineering gets. But 3D printing in China is also busy at the other end of the market: extruding filaments of molten plastic to build up objects such as toys, mobile-phone cases and car fittings. One of the biggest firms in this field is Tiertime, which operates from Huairou on the outskirts of Beijing. Tiertime makes a range of 3D printers that produce objects from polymeric “alloys” of acrylonitrile, butadiene and styrene (ABS, the material from which Lego bricks are made). Tiertime’s printers are also often used in the prototyping business, but unlike those of AFS they sit in designers’ offices rather than on factory floors. Some are small enough to sit on a desk. They allow people to print their ideas directly, rather than having to send them off to be made by others.
The company also makes even smaller printers, called UP, which sell for less than 6,000 yuan. Personal printers like these are helping to create a Chinese version of the “maker movement”—a mixture of hobbyists and craft producers who, finding that 3D-printing technology greatly lowers the cost of going into production, are creating small manufacturing businesses. The maker movement began in America, but it is taking off in China too. Maker fairs are now being held in some of the big cities. Officials seem happy to encourage this, and some talk of introducing 3D printers into schools, to spark pupils’ interest in careers in engineering.
3D printing is still a long way from replacing mass manufacturing. But in China, as in America and Europe, the technology is changing the way products are developed and made. And by lowering the cost of entry, 3D printing could herald yet another new generation of Chinese manufacturing entrepreneurs.
Is Pakistan the Next Frontier for Entrepreneurs?
for Tech in Asia
Early Days
Building Internet businesses has traditionally not come easily to Pakistan. Our first e-commerce venture began in 2001 with the establishment of Abid Beli’s Beliscity.pk. Although initially started as an information website for mobiles and computers, it soon turned into an e-commerce store as a result of its growing popularity.
You might then expect this venture to have turned out a success story, with Beliscity ending up being the equivalent to Amazon in Pakistan. Unfortunately this was not the case. Owing to many complications and troubles, not only was Beliscity forced to changed its name to Gulf Dealz, but it also fell into obscurity competing with countless other players in the online retail arena.
Arguably Pakistan’s greatest Internet success story is Rozee.pk. Founded in 2007 by Monis Rahman as an add-on to his main business, Rozee has grown to become Pakistan’s premier portal for jobs. This journey was also not an easy one at all. When Monis was trying to raise funds through foreign investors in the second half of 2007, Pakistan was in the news almost daily with images of the bombing due to Benazir Bhutto’s arrival and her subsequent assassination.
3 Hot E-Commerce Startups to Watch in Pakistan
Those, however, were just the early days and the environment seems much more conducive to starting e-commerce ventures now. Last year will go on record as a landmark year for Internet businesses in Pakistan as three very different and important companies launched their own e-commerce portals:
- TCS Connect is the online portal of TCS Couriers, Pakistan’s most reliable and wide-reaching logistics company. In May 2012, TCS launched its online shopping portal, TCS Connect, which has products like computers, mobile phones, home and kitchen appliances and even automobile accessories.
- Labels eStore is the online store for Pakistan’s largest high-end fashion outlets. With its product lines covering the biggest fashion designers in Pakistan, it targets high-end consumers in the local market and the Pakistani diaspora across the world.
- Daraz.pk represents the fashion vertical of the global venture developers, Rocket Internet. The company did not enter into our local online market arena at the behest of Pakistani entrepreneurs who sought funding, but rather as a ‘top-down’ decision by Oliver Samwer to capture the developing Pakistani market in the long-term.
The establishment and subsequent success of these and other businesses have led to a greater focus on e-commerce sites. They may be other clothing brands expanding their businesses online, logistics companies either starting online stores themselves or providing tools and consultancy for brick-and-mortar retail owners to start a digital side to their existing businesses, or young entrepreneurs themselves wanting to get into this nascent business.
Whatever the case, online stores are here to stay in Pakistan and will only attain a larger customer base going forward.
The success of Rocket Internet’s Daraz has also made other venture capital firms take notice and start making initial contact with local players in the industry to fund entrepreneurs.
Future Outlook, Untapped Space
With this hive of activity, the future for Pakistan’s e-commerce and Internet industry has a positive outlook. Local entrepreneurs should seize this opportunity to capitalize on the open market space. The diagram below illustrates the vast amount of untouched market space, ready and waiting to be capitalized:
Disclosure: Adam Dawood is the founding partner of DYL Ventures, a Pakistan-centric venture capital and consultancy firm. One of the first employees of Daraz.pk and its product manager, Adam has now returned to the family business, DYL Motorcycles, and is looking to the future in both the motorcycle and e-commerce industry. You can find him on Twitter as@adamdawood. Please see our ethics statement for further information
Omidyar Network releases African entrepreneurship report, it’s a must read
By The project started with a survey of 582 entrepreneurs across six Sub-Saharan African countries: Ethiopia, Ghana, Kenya, Nigeria, South Africa and Tanzania which was then augmented into 72 in-depth interviews. It promises to be one of the most comprehensive studies done on African entrepreneurship to date.
Benchmarked against 19 global peers like China, India, the USA and the UK, the issues addressed were divided into four critical aspects of entrepreneurship:
- Entrepreneurial assets: financing, skills and talent, and infrastructure
- Business support: government programmes and incubation
- Policy accelerators: legislation and administrative burdens
- Motivations and mindset: legitimacy, attitudes, and culture
The second phase invited business, government and thought leaders to the 2012 Entrepreneurship in Africa Summit, held in Accra Ghana, to analyse the survey findings, and offer proposed solutions.
The report presents the findings of the survey, as well as the outcomes and solutions given at the Accra meeting. We have compiled an abridged version of the report for your reading-pleasure, but if you wish to read the full version you can find it here.
The report starts by listing financing, skills and talent, and infrastructure as Africa’s greatest challenges.
FINANCING
The study quotes research by the International Finance Corporation that estimates that up to 84% of small and medium-sized enterprises (SMEs) in Africa are either un-served or underserved, representing a value gap in credit financing of US$140- to 170-billion.
So there’s not enough capital right? While, 71% of the entrepreneurs surveyed agreed, the report says something rather interesting: financiers argue that many of the new ventures are simply not fundable. Financiers note a lack of fundable business plans, pointing to issues ranging from the quality and feasibility of the business idea to the commitment of the entrepreneur and his or her team.
Of the six countries surveyed, Kenya seems to fare the best in terms of capital supply — only 52% of Kenyans sees this as a challenge.
The main sources of financing are personal and family loans (45%), private equity (19%), bank debt (18%), government funding (5%), venture capital (5%), angel seed (4%) and other (4%). “Other” funding sources include corporate funding, lease / receivables financing or stock options. Some entrepreneurs in South Africa claim that their businesses are funded using multiple credit cards because most banks are reluctant to provide a loan to businesses but are willing to increase limits on the entrepreneurs’ credit cards — expensive, but easy.
The majority of respondents are in agreement that the cost of funding is too expensive — the report found that in some cases, banks require 150% of the borrowed amount in collateral. An alternative, government lending, could be more attractive was it not for bureaucracy and nepotism reported by some respondents.
The report concludes that venture capital in Africa is still an emergent phenomenon and the majority of survey respondents (67%) agree. Entrepreneurs are forced to pursue bank loans which simply are not tailored for startups. Banks see startup investments as high risk, low reward and like to quote statistics that show 9 out of ten startups fail within the first five years of operation.
Illustrating a profitable business model is critical to boosting VC activity in Africa says the report. Entrepreneurs need to focus on being rigorous business planners and demonstrating their understanding of a particular sector to investors. Entrepreneurs must “know something about everything, and everything about something,” says the founder of First Rand Group in South Africa, Paul Harris.
The report warns however, that finance is not the determining cause of a venture’s success or failure. “Rather, the entrepreneur’s ability to adapt to market changes and cope with uncertainty, as well as their level of tenacity, are greater determinants of a business’ success.” Entrepreneurs also forget about market access. Without multiple product channels, revenues and profits likely stall, and this lack of growth makes funders reticent to invest.
When looking for funding it’s important to get matched with the correct funding provider and to be proactive. A mismatch might occur where a financier is looking for historical data when the venture is fledgling. Entrepreneurs must identify the availability of capital sources and the suitability of capital given their company’s stage of growth. They must also be able to assess their funding requirements and identify those funders that are most likely to fund them. The report advises that misperceptions and misunderstandings can be mitigated by enhanced communication.
The report identifies a lack of viable exit opportunities, which leads to a disincentive for funders to make investments — funders can’t recoup their investments.
48% of Ghanaian respondents report that it is uncommon for business owners to use buyouts to sell their firms. Respondents in Ethiopia (42%), Tanzania (41%), Nigeria (38%) and Kenya (37%) share the same concern. The regulations for exiting businesses are also considered rigid, and there is little awareness about the fact that large multinational corporations or private equity funds can sometimes be compelling buy-out options.
The report raises a fascinating point about how the size and power of an entrepreneur’s network shapes innovation. A larger, more powerful network, with a larger funding pool will allow for bigger ideas and lessen the chances of a startup stagnating.
The research calls for the formalising of seed and angel investing networks. It singles out successful examples, such as the Mo Ibrahim Foundation and the Tony Elumelu Foundation.
To mitigate some of the challenges, the study proposes solutions for startups in different growth stages.
Early-stage enterprise financing in Africa
- Reduce bureaucracy for early-stage companies to access government funding in order to provide ‘softer’ sources of financing for less-experienced entrepreneurs.
- Expand or initiate local angel investing ecosystems to ensure the availability of the most appropriate type of funding for start-ups, especially for entrepreneurs who lack the network of friends and family that traditionally play this role.
- Provide tax and other incentives to formal, as well as informal (e.g., family and friends), angel investors to make it easier for people who have extra cash to invest in startup businesses and reduce their risk.
- Provide tax and other incentives for large clients of early-stage ventures to provide supplier credit to incentivise and reduce the risks suppliers take when providing generous payment terms and/or stock to new ventures.
Mid-sized enterprise financing in Africa
- Leverage indirect personal sources of funding, such as pension funds to fund SMEs, so that more resources are available to fund more-established enterprises where the risks are lower.
- Expand or initiate local venture capital investing ecosystems to ensure that the most appropriate source of funding is available for companies at the mid-level stage of development.
- Use local banking systems to disburse donor or government lines of credit to SMEs to reduce prohibitive interest rates and collateral requirements.
- Provide incentives and support to mid-sized SMEs to practise sound financial management and maintain adequate records, including audited statements.
Later-stage enterprise financing in Africa
- Create capital-raising engagement programmes with leaders of well-established private African enterprises to inform entrepreneurs about the benefits of private equity funding, as well as the benefits of listing at local stock exchanges.
- Create continent-wide ‘regional champions’ programmes to facilitate access to capital (both debt and equity) for independently vetted pan-African companies that are expanding across the continent.
- Educate entrepreneurs about possible sources of funding outside banking systems.
- Train and assist early-stage entrepreneurs in the intricacies of capital-raising.
- Train the local financial community to evaluate investment opportunities on the basis of future prospects rather than historical cash flows.
SKILLS AND TALENT
The report identifies a need for experienced managerial talent to complement technical talent. Startups lose out to well-established corporate firms that have the means and security to hire those specialising in management.
The research suggests that management and other entrepreneurial skills should be fostered in schools. African schools are geared for producing a corporate workforce. As entrepreneurs in Africa require training and education to allow them to succeed in starting or growing a business, more time should be devoted to entrepreneurship at primary and secondary level.
Respondents overwhelmingly agree that there is an inadequate focus within schools on the practical skills required to start, manage or work in entrepreneurial ventures. The same goes for tertiary institutions that according to respondents, lack practical aspects. Limited opportunities for hands-on learning and managing small projects mean that students are not afforded clear paths for cultivating competencies related to practical thinking and creative problem-solving — skills needed to successfully build and manage a business. As a result, most Afro-entrepreneurs do not feel adequately trained to manage a new firm, which for many leads to the tendency to look for corporate jobs.
There’s also a culture problem, says the report. Society fails to encourage students to recognise their entrepreneurial potential, as society often values and respects professionals over entrepreneurs.
The study notes that it is important to teach entrepreneurs to delegate. Taking on too much is hazardous, it is important to identify the professional skills needed, acknowledge existing strengths and gaps on the team and then source the missing skills accordingly.
Trust must also be established between businesses and service providers. Among entrepreneurs, a significant fear exists that, whilst engaging advisory services, the service providers may steal their business ideas.
How should startups attract talent, when they can’t offer corporate salaries? Providing
opportunities for problem solving in the work environment, which offers increased individual responsibility, is an effective means of attracting talented staff. Startup culture should also excite, inspire innovation and reward creativity.
The study goes on to provide recommendations for mitigating skills and talent challenges.
- Include entrepreneurial and vocational training in the education system in Africa so that learners are exposed to entrepreneurship from a young age.
- Leverage Internet-based solutions that offer training in business skills and entrepreneurial management to provide assistance to entrepreneurs that is scalable and available at relatively low costs.
- Establish communications and career counselling programmes that encourage and guide young people towards the creation of entrepreneurial ventures.
- Institute secondment, mentorship and networking programmes where seasoned executives (previously or currently employed) support SMEs for limited periods by working alongside and training SME staff on key projects.
- Offer incentives (e.g., subsidies, tax advantages) to entrepreneurs who offer strong employee value propositions to prospective professional staff, such as stock option programmes or specialised training.
INFRASTRUCTURE
The report cites access to electrical power as the biggest challenge in terms of infrastructure, especially in Nigeria where only 27% of respondents believe that the physical infrastructure provides sufficient support for new and growing firms. South Africa seems to have the most stable supply, but suffers from high tariffs.
Additionally, poor quality and limited breadth of road and rail networks, and poor communications infrastructure are all highlighted as having a significant impact on the cost of doing business.
Only 38% of Afro-entrepreneurs agree that infrastructure provides sufficient support for new and growing firms. 23% of those surveyed believe that new and growing firms could afford the costs of using infrastructure.
The report suggests deploying and upgrading infrastructure first in selected productive areas where there are substantial business activity and strategically important local industries, and to favour public-private partnerships in the execution of
infrastructure projects.
POLICY ACCELERATORS
Africa might lag behind its global peers on the Entrepreneurial Assets and Business Assets front, but when it comes to Policy Accelerators the continent is in touching distance of the world’s legislation. There remains key administrative burdens to overcome though.
Legislation
The survey responses indicate that laws governing business competition are perceived to have a bias towards well established firms because they are better equipped to handle the heavy penalties for non-compliance. This bias is particularly felt with South African entrepreneurs who view the requirements of the Labour Relations Act, Consumer Protection Act, and National Credit Act 73 as onerous and time-consuming.
Heavy penalties for non-compliance also unwittingly encourages entrepreneurs to set up shop in the informal sectors where they can stay below the law’s radar, avoid paying taxes, operate without certificates and informally hire employees.
Not only did 60% of respondents say that they find it acceptable to establish a startup in the informal sector, but 62% personally knew entrepreneurs who had done so.
Formalising industries and processes is key to the state not losing out on potential tax revenues and affording entrepreneurs better access to financial and consumer-markets. Preparing entrepreneurs to operate more formally and compensating for higher operating costs in a regulated environment were identified as challenges.
Administrative Burdens
Despite acknowledgement of recent improvements of reforms to doing business, administrative burdens still plague the continent. Other than South Africa (35), Kenya (109), Nigeria (133) and Tanzania (127) all rank in the bottom half of the 183 countries ranked by ease of doing business. The same holds true for rankings for starting a business.
The report proposes that policy accelerators should offer incentives to entrepreneurs to enter and develop key sectors that are currently underserved as well as to develop more nuanced legislation that differentiates between big business and SME segments.
Legislation should also reduce the excessive costs, time and bureaucracy associated with regulatory compliance to encourage startups to enter the regulated environment. Reforms should aim to continue to reduce red tape and create a more enabling environment for new businesses.
MOTIVATIONS AND MINDSET
The Monitor Survey suggests that pursuing entrepreneurship as a career has gained acceptance and legitimacy in Africa but for the most part African entrepreneurship culture is defined by necessity – entrepreneurship as a means of survival, a last resort, not the pursuit of opportunity or aspiration. Efforts should be placed upon changing this mindset from necessity to opportunity.
It is also noted that Africans might not fully appreciate the ‘entrepreneurial journey’ and the practical challenges that come with it, but rather romanticise the image of a bold and rich entrepreneur who conquers markets and lives a life of luxury.
The notion of a successful ‘business person’ relies on wealth and lifestyle rather than business acumen and entrepreneurial flair. This drives the mindset of young people embarking on entrepreneurial ventures, who often enter an industry without enough knowledge of said industry and therefore cannot innovate or compete effectively.
To cull these stereotypes and offer another model of success there is a convergence of the awards celebrating entrepreneurship as well as media coverage promoting successful African business stories.
The attitude towards failure was also identified as a challenge – hindering risk taking in business ventures. It was proposed that ‘bouncing back’ should be a far more effective trait to nurture.
While most respondents agree that governments have a role to play in fostering a culture of entrepreneurship, views are mixed as to the extent that that role should be. Opponents to the notion view government as – by its nature – not being entrepreneurial. They also voiced concern that a dependence on government could stifle creativity and resourcefulness.
Proponents of the notion point to South Korea, whose government successfully improved its culture of entrepreneurship after the 1997 economic crisis by encouraging entrepreneurship with creative policies that changed tax laws and bankruptcy codes.
One solution offered for motivations and mindset is to establish programmes and media initiatives that celebrate entrepreneurs’ success, honour their journeys and encourage those who have failed to rise again. Another solution would be to formulate and introduce income-insurance schemes for selected types of African entrepreneurs.
The Emerging Markets Look More Like Submerging Markets
Photograph by Sasha Mordovets/Getty Images
From left, Indian Prime Minister Manmohan Singh, Chinese President Xi Jinping, South Africa President Jacob Zuma, Brazil’s President Dilma Rousseff, and Russian President Vladimir Putin at the BRICS Summit on March 27
The article below supports our longstanding thesis, that it is time to move Beyond The BRICS when considering international expansion.
The U.S. economy, we’re told, is in the middle innings of a long humbling at the hands of emerging markets. Here we have Beltway melodrama and—no joke—job creation by way of the Doritos Locos Taco. As for developing upstarts, they by and large enjoy better growth, more stable debt balances, burgeoning consumer classes, and fresh swagger at international confabs.
The ascendance of the emerging markets was supposed to be brought into sharp relief as the world recovered from the financial crisis. But since they peaked in late 2007, the BRICs—Brazil, Russia, India, and China, the supposed core of the emerging-market dynamo—have on a total-return basis vastly underperformed the U.S.’s Standard & Poor’s 500-stock index. While the iShares MSCI BRIC Index is down 38 percent since its December 2007 high, U.S. stock indexes have made up all their lost ground and more, rising 5 percent over the same period. And the trend shows no sign of reversing: In 2013, the broad MSCI Emerging Markets Index is off to its worst start to a year since 2008, lagging behind shares of developed economies by the most in 15 years, according to Bloomberg data.
It’s also the first time in 15 years that developing shares have underperformed during a global market rally. They are, it seems, victims of their own decade-plus of outsize success, with their governments trying to contain inflation while keeping growth at a satisfactory pace.According to Bloomberg’s Michael Patterson and Inyoung Hwang, most emerging-market companies have missed analyst profit estimates for the last five quarters, with expansions in economies like China and Brazil slowing to their weakest clips since 2009.
There are exceptions to this trend, like Thailand and the Philippines. The latter, in fact, was highlighted in a position paper (PDF) by Turner Investments touting the era of the TIMPs, which groups Turkey, Indonesia, and Mexico alongside the Southeast Asian upstart.
In China, the center of emerging-market gravity, Beijing is capping retail fuel and natural gas prices to address potentially destabilizing inflation. Along with intervening to tamp down fuel prices, Brazil is moving to keep down utility rates, bank lending profits, and mobile-phone costs. None of which has particularly encouraged BRIC residents to put money into their homeland shares.
Foreign Policy’s War of Ideas blog has a headline out that reads: “The Case for Kicking All the Countries Out of the BRICS.” The post collects critiques from a variety of experts questioning the validity of the BRICs as a coherent investing thesis. “India is as bad on Russia on governance and corruption,” it quotes a regretful Jim O’Neill, the recently retired Goldman Sachs (GS)economist who coined the term in 2001.
You could, of course, look at all the hand-wringing over developing markets as a contrarian indicator—not unlike the prevailing pessimism of a decade ago that presaged a boom.
Business in Bulgaria: One Entrepreneur’s Journey
The narratives that surround the past and present economic state of Bulgaria are not unfamiliar ones. The transition to a liberal market economy culminated in complete economic collapse. From 1996 – 1997 Bulgaria experienced a period of instability and hyper-inflation.
The establishment of a fixed exchange rate for the Bulgarian currency and the nation’s entry into the European Union, has since stimulated macroeconomic growth. But Bulgaria remained one of the poorest member states of the European Union. Despite an improving economy and rising living standards, unemployment continued at high percentage levels. Though foreign direct investment has managed to stimulate some economic growth, entrepreneurship in Bulgaria encounters a host of challenges.
Bulgaria experienced a revival of the entrepreneurial spirit in the late 19th century, following their declaration of independence from the Ottoman Empire. Despite continued warring, international trade flourished. It was between 1949 – 1989, during the Communist regime, that prosperity through private entrepreneurship was suppressed and designated as self-serving. Negative attitudes toward entrepreneurs continue to influence the Bulgarian economy.
In today’s volatile economic climate, Bulgaria does not possess enough free money to make investments in innovation. Predictably, the Bulgarian government has rendered private property and trade nonexistent, depriving aspiring entrepreneurs of private resources to mobilize. The process of partaking in capitalism without sufficient capital has resulted in fragmented entrepreneurial efforts, and often limits them to the service sector.
Business In Bulgaria: One Entrepreneur’s Journey
Victor Alexiev, entrepreneur and general renaissance man, would thus appear to be succeeding against all odds. Born and raised in Sofia, Bulgaria, Victor’s past 13 years credit him with work in mathematics, software development, network architecture and investment banking, to name a few. In that time, he also attached two Bachelors and three Masters degrees to his name. Of late, however, Victor has realized his erratic work life could feasibly lead to unemployment, as no one can make sense of his past.
As a result Victor has refocused his efforts on entrepreneurship, a personal passion from his childhood. Victor had started his first business at age 14, building his own Internet Service Provider (ISP) and selling and installing the service in his hometown. With the help of classmate and fellow budding entrepreneur Todor Kolev, Victor’s business grew to 150 customers spanning three towns in 2001. And when underage Victor was contacted by the government’s commission for regulation of telecommunications due to licensing issues, he simply sold the venture to local competitors and transferred his customers to them.
Victor and Todor bonded over their shared passion for entrepreneurship and in 2008, the two began to work together. Obecto, a software development venture, grew steadily for four years before the co-founders encountered difficulty expanding their team. Job postings and hiring services yielded disappointing results, and candidates always seemed to be lacking the connection that made them a strong fit. In 2011, the two began to consider more effective and efficient ways to source and evaluate talent.
The issue of staffing was one many companies faced, in particular those looking to hire software engineers in a market that had grown beyond its carrying capacity. The job market was certainly not improved by an attitude of skepticism toward independent ventures and risks. Victor explains:
Employers were making promises they could not deliver upon, talents were making unrealistic demands, and there was a need for a more transparent marketplace.
That same year, Victor and Todor joined forces with their third partner, Ivan. Drawing upon his background in psychology and psychometrics, the three came together to build a recommendation platform specifically for software engineers in Bulgaria.
PoolTalent
The result is PoolTalent, a job board and recommendation aggregate. Though PoolTalent is intended for use entirely by job seekers and employers, the use of matching and personal profiles is strongly modeled on a typical dating site. The site makes uses of a compensatory algorithm that incorporates matching skill sets as well as cultural fit into its final scoring.
PoolTalent’s first version was released in late 2011, with a focus on data collection as well as social media and community features for users. However, a lack of engagement forced Victor and his co-founders to return to the drawing board, this time designing with users in mind. After a second disappointing release, the three decided to put the project on hold temporarily.
It was during that summer of 2012 that Victor happened upon and learned the methodology of customer validation. Victor and his co-founders went and gathered feedback from large IT recruiters based in Bulgaria, such as Hewlett Packard Bulgaria, Playtech and VMware.
The resulting version has abandoned social features in favor of focusing on becoming an information platform for jobseekers in the software development community. Customer input has now led to validation of the concept and ultimately, preliminary partnership agreements. PoolTalent now has 150 registered users, four partner companies and two active clients. They have recently expanded their reach to the career center of the Technical University of Sofia.
A New Bulgarian Economy
PoolTalent is an example of a new Bulgarian economy, as the entrepreneur movement gains popularity once again. Several of the nation’s non-profits provide small amounts of seed capital through competitions in order to promote entrepreneurship. Entry into the European Union has opened access to assistance funds that are now being utilized.
Victor’s story is an important one, because of his success in an environment that so clearly worked against him. Despite the improving economic climate, legislative framework, educational infrastructure and financing options remain insufficient to support disruptive or capital intensive startups.
Bulgaria’s attempts at developing entrepreneurs, albeit slow, is a much needed change. With a clear set of goals in mind for the immediate future, Victor is on his way to becoming just what Bulgaria needs: A practicing entrepreneur building a serious business.
Against all odds? You bet.
$29M EXIM LOAN CINCHES HONDURAN WIND POWER DEAL
By: L. White, Global Trade Magazine
A Pennsylvania company will manufacture and export twelve high-tech wind turbines for export to Honduras as a result of a $29 million direct US Export-Import Bank (EXIM) loan to project developer and borrower, Energía Eólica de Honduras S.A.
According to EXIM, the Honduran company will, in turn, sell the electricity generated by the turbines to the Central American nation’s utility, Empresa Nacional de Energía Eléctrica.
The terms of the loan call for Trevose, Pennsylvania-based Gamesa Wind US, LLC, to manufacture and export six each of its high-efficiency model G87 and G-97, 2.0 MW turbines to generate electric power in rural Honduras. Some 200 workers will be employed on the new Honduras project, said the US energy technology company.
The company currently operates two facilities in the US – a blade factory in Ebensburg, near Johnstown, and a nacelle plant outside Philadelphia.
The new deal, the bank said, helps to expand a project it first supported in 2010, when its long-term financing of 51 US-made turbine generators established the Cerro de Hula Wind Farm in Santa Ana, Honduras, EXIM said.
The Cerro de Hula Wind Farm now produces about six percent of the electrical power in Honduras. With the additions from this transaction, the wind farm will have 63 wind turbines and a total installed capacity of 126MW providing power to the national electric utility.
Gamesa Wind US, LLC is a subsidiary of Gamesa Technology Corporation, a sustainable-energy firm headquartered in northern Spain.
The parent company ranks as the fourth-largest manufacturer of wind turbines in the world and is in the top ten globally for wind farm development. It also develops and constructs photovoltaic power stations and wind farms both on land and off-shore, according to its website.
According to EXIM, although the parent company is Spanish, the bank provides financing “only for goods and services associated with production by US workers.”
Emerging Markets: Should You Bond With Azerbaijan?
When you reach for yield, think about how far around the globe you should stretch.
Lately, investors haven’t been able to get enough emerging-market bonds, issued by governments and companies in dozens of countries in Latin America, Europe, Asia and Africa. In the year ended Jan. 31, $28.7 billion poured into mutual funds and exchange-traded funds that specialize in emerging-market debt, on top of the $53 billion in assets they started with, according to Morningstar. That is the highest growth rate of any bond-fund category.
Such funds yield an average of roughly 4%, more than twice the yield on the BarclaysBCS +1.28% Aggregate index of U.S. government and corporate bonds. So it is no wonder investors are scurrying to Peru, Kazakhstan and even Zambia for higher income.
But these are places only for the brave.
Christophe Vorlet
Bonds in emerging markets have a long, often dangerous, history. British investors were enamored of Latin American bonds in the 1820s—right before several Latin countries defaulted. Baring Brothers, the great merchant bank, had to be rescued by the British government in 1890 after overinvesting in Argentine debt.
What is different now is the credit quality of these bonds. As credit ratings for the U.S. and Europe have fallen, emerging countries have been upgraded. Their economies generally are booming, and their borrowing is under control.
“You can’t deny that in a lot of these countries the fundamentals are super-strong,” says Nicolas Rohatyn, chief executive of the Rohatyn Group in New York, which manages $2.9 billion in emerging-market investments.
The bonds of developing countries used to act more like stocks. In 2008, the average emerging-market bond fund fell about 18%, while medium-term U.S. government bond funds gained 4.8%.
Now, however, bonds from developing countries with steadily improving economies “function more like safe havens,” says Pablo Goldberg, head of emerging-market research at HSBC Securities.
But the perception of safety has its price. Edgardo Sternberg, who manages roughly $800 million in emerging-market debt at Loomis Sayles in Boston, says the most popular emerging-market government bonds priced in dollars have risen so much lately that they have “nowhere to go.”
Consider the bonds due in March 2023 issued by the government of Colombia. They yielded 3.1% as of Friday. Colombia has recently been upgraded by all three major credit-ratings firms, and its economy is expected to expand by at least 4% this year.
But that yield on the Colombian bonds is just 1.1 percentage point more than the 2% you get on bonds of similar maturity issued by the U.S. Treasury, even though a Marxist rebellion has long simmered in Colombia.
Or look at bonds from the Russian government that are due in April 2022. They yielded 3.2% this week as of Friday. Russia is awash in oil money, and its government is far less indebted than Uncle Sam.
Still, Russia defaulted on its debt in 1998. The April 2022 bonds yield only about 1.1 percentage point more than U.S. Treasury bonds maturing around the same time, although some investors are uncomfortable lending to a government they see as autocratic and capricious.
At such levels, Mr. Sternberg says, “there’s really nothing attractive” about bonds like these.
A recent study by Robeco, a Dutch investment-management firm, shows that emerging-market government bonds issued in U.S. dollars tend to fluctuate in value much the same way as U.S. high-yield corporate bonds.
Thus, if you already own a high-yield bond fund, emerging government bonds issued in dollars offer less diversification than you might expect, say Johan Duyvesteyn and Maurice Meijers of Robeco.
Mr. Rohatyn of the Rohatyn Group points out that with governments in Europe and Japan determined to depreciate their currencies, emerging markets are bound to benefit from better exchange rates.
That would make their government bonds—if denominated in local money—more valuable to U.S. investors. But such debt issued in dollars will remain vulnerable to any sharp rise in U.S. interest rates, he says.
Analysts say that in emerging markets, corporate debt is often more attractive than government bonds. Aziz Sunderji, a credit strategist at Barclays, says the valuations on emerging corporate bonds “are certainly not stretched” in general. The market, dominated by big global firms like Brazilian mining giant Vale VALE -2.51% and Russian energy company Lukoil LUKOY +1.68% Holdings, is approaching $1 trillion in outstanding debt.
Among the exchange-traded funds specializing in local-currency debt are iShares Emerging Markets Local Currency Bond, LEMB -0.09% Market Vectors Emerging Markets Local Currency Bond, EMLC +0.12% SPDR Barclays Capital Emerging Markets Local Bond and WisdomTree Emerging Markets Local Debt ELD +0.09% . All have annual expenses of no more than 0.6%, or $6 per $1,000 invested. As issuers from “frontier” countries like Azerbaijan, Bolivia and Tanzania enter the market, check to make sure the holdings aren’t getting too exotic for your taste.
While the future for emerging-market debt looks bright, the past should give you pause. Invest in these bonds only if you know you are as brave as you think you are. Sooner or later, you are going to find out how much risk you can withstand.
Write to Jason Zweig at intelligentinvestor@wsj.com
How to Play Investing’s Wild Frontier
Finding the real emerging markets can be tougher than it sounds.
Most emerging-market funds are dominated by a handful of big stock markets, such as South Korea, China, Brazil and India. But some of the most interesting opportunities might now lie among so-called frontier and lesser-known emerging markets such as the Philippines, Peru and the Gulf region, some experts say.
Many such markets promise higher long-term growth and cheaper valuations than the better-known emerging ones. Traditionally, these markets have been considered too “risky” for most investors. But that reputation might be misleading.
“Many investors think the frontier markets are very risky, but over the past one, five and 10 years a frontier portfolio had about half the volatility of an emerging-market portfolio,” says Asha Mehta, who manages $170 million in frontier investments at Acadian Asset Management.
Small economies at an early stage of financial development tend to dance to their own tunes, Ms. Mehta says. “These countries are so uncorrelated to each other,” she says. “Frontier markets move in a very idiosyncratic manner.” As a result, they are much less risky as a group than any individual market.
Investors are starting to take note. Since Jan. 1, the MSCI Frontier Markets index has risen 7%, while the MSCI Emerging Markets index has fallen 1%.
Still, frontier markets have lagged behind emerging markets since 2008. The gap between the MSCI Frontier Markets index and the MSCI Emerging Markets index remains near historic lows.
Strategists say that leaves frontier markets comparatively inexpensive. “The frontier markets are at a much bigger discount than they have been in the past,” says Pradipta Chakrabortty, co-manager of the $100 million Harding Loevner Frontier Emerging Markets Portfolio, which invests in both frontier and smaller emerging markets. He says frontier markets now, unusually, trade for lower multiples to earnings than their emerging-market peers. Traditionally they have traded on higher multiples to reflect higher growth rates.
“The best opportunities are being found in the frontier markets, where valuations are low and growth is high,” says Mark Mobius, executive chairman of the emerging-market group at investment giant Franklin Templeton, which has $810 billion under management. He particularly likes Persian Gulf coast countries, such as the United Arab Emirates, Saudi Arabia and Qatar, calling valuations there “compelling.”
Lewis Kaufman, manager of the $275 million Thornburgh Developing World Fund, says his favorite markets include Peru and the Philippines, where economic growth is accelerating.
Ms. Mehta at Acadian likes the Gulf states and Kazakhstan, the oil- and mineral-rich central Asian republic, where the economy is growing quickly.
To be sure, investing in these markets isn’t for the fainthearted. They can be volatile. It can be costly, and difficult, for investors to buy and sell. Some markets, such as Saudi Arabia, can’t be accessed directly. Many countries suffer from political turmoil, poor corporate-governance standards and corruption.
And fast-growing economies don’t always produce higher investment returns. Among the reasons, say experts, is that investors too often buy in a boom and overpay for stocks.
Yet high growth and lower valuations is an attractive combination, strategists say.
Mainstream emerging-market funds are increasingly dominated by big multinationals, such as South Korea’s Samsung Electronics 005930.SE +1.11% and Taiwan’sTaiwan Semiconductor Manufacturing, TSM 0.00% which are heavily exposed to the sluggish global economy. Eight equity markets—South Korea, Taiwan, South Africa, Mexico, Brazil, Russia, India and China—also make up 80% of the MSCI Emerging Markets index.
That leaves fund investors with little exposure to more dynamic opportunities elsewhere. But those who want to go beyond traditional emerging markets do have a few options.
Some exchange-traded funds track indexes of stocks across multiple markets. But because of the way such indexes are constructed, the portfolios end up with some peculiar weightings. The iShares MSCI Frontier 100 Index Fund, FM +0.17% with annual expenses of 0.79%, or $7.90 per $1,000 invested, is one. But Gulf coast markets account for about 60% of the fund. Guggenheim Frontier Markets,FRN +0.16% with expenses of 0.65% or $6.50 per $1,000 invested, has 42% of its portfolio invested in Chile.
Some advisers recommend paying higher fees for an actively managed fund that can pick its way through these complex markets. Typically, fees for these funds are higher than for funds that invest in domestic stocks, where trading costs are lower.
The Harding Loevner Frontier Emerging Markets Portfolio invests in smaller emerging markets and frontier markets, and is widely diversified across regions and countries. It gained 22% in the year ended Jan. 31, compared with 20% for the frontier-markets index. It has annual fees of 2.25%. Nicholas LaVerghetta, a wealth manager in Ramsey, N.J., with $61 million under management, likes the Wasatch Frontier Emerging Small Countries fund. It gained 36% in the year through Jan. 31. Its fees are also 2.25% a year.
Mr. Mobius’s Templeton Frontier Markets Fund has gained 75% since it was launched in October 2008, while the MSCI Frontier Emerging index has lost 16%. The fund class with a 1% sales charge has annual expenses of 2.85%.
All investments are risky. At least with frontier markets, there are good reasons to think you are getting paid to take the risk.
Growing the Industry in Emerging Markets
Robert Heeg, RW
Do research companies market themselves effectively?
In mature markets, where marketing has penetrated all layers of society, the benefits of market research are generally understood. But what is the situation in emerging markets such as Central and Eastern Europe and the Middle East? Do these regions’ research suppliers promote their skills sufficiently?
In emerging markets the marketing aspect of the industry is often underdeveloped, as Jiří Michal found out. Michal is manager consumer insights and strategy at Kraft Foods in the Czech Republic. “Unfortunately,” he says, “the marketing of the majority of Czech research agencies is extremely inadequate.” He gives us some recent examples of how well-known research agencies approached him. “A potential partner took a lot of effort explaining all the tools he could offer. I had to stop him after ten minutes, asking for examples of potential business issues we might face, and how they could help us with these. But all they could talk about were tools, not business.”
Other suppliers were trying to sell Michal neuroscience, eye tracking and TVC testing, stressing how these were better, quicker and cheaper. “Again, completely misunderstanding the way I would approach these techniques as a buyer. For me, these fields are definitely interesting, but only as complementary to broader business solutions.”
Astonished
What left Michal speechless was the one agency – a member of Czech market research association SIMAR – that explained how lower margins had forced other agencies to jeopardise data quality. “They even said they considered launching a big campaign about this alarming topic. I was completely astonished! They use a sales pitch in which they challenge the data quality of their top peers? I take data quality in this country for granted. Their message would completely undermine that trust. Instead, they should focus on my client needs and cooperate within SIMAR to improve the perception of the industry as a whole.”
In Romania, Alina Serbanica, senior vice president of global RAES at Ipsos Interactive Services, signals quite the opposite. “Providers work together to educate clients on the benefits, added value and strengths of consumer research.” Over the last 20 years, she has seen her industry improving, using cutting-edge research methodologies and techniques. “Despite the Romanian economy lagging behind, and the big gap between urban and rural areas, all market research players do their utmost to embrace innovation and promote high-quality market research services.”
TV stars
Over in the Middle East, one of the few remaining growth regions, several international and many boutique agencies have invested and opened in the region over the past several years, reports Steve Hamilton-Clark, CEO for TNS Middle East & North Africa. “Competition has increased, and this is good – it has made all players work harder and smarter at positioning themselves intelligently, showing how each can and does add value.” However, he adds that over the past three years or so this has been diluted by a focus on pricing to win (and protect) share, diverting attention away from an added-value proposition.
As one of the oldest democracies in the region, Lebanon is a fairly mature research market, with agencies publishing reports on political, social and economic issues. This has familiarised most Lebanese with market research, observes Tarek Ammar, CEO and co-founder of ARA Marketing Research & Consultancy. “Many colleagues are now considered TV stars.” However, he adds that sometimes over-usage of research data is hurting the industry. For example, a ‘brand of the year’ logo appears on many FMCG products, implying that the consumer chose these brands. “But many of these brands had just been introduced and were not well known. The selection was limited to brands that paid to join the poll! In this case, publicity for market research failed to create value for our profession.”
Ideas and inspiration
Serbanica is happy to report that more and more clients in Romania understand and recognise the importance of market research. “Since the economic crisis, more clients – including local Romanian ones – better understood the need for exploring consumer insights as their needs, consumption and expectations changed as well.”
From a client perspective, Michal confirms that market research can definitely bring added value for companies like his. But, he adds, “Unfortunately, not many research agencies are able to do that. We are searching for partners to solve business issues, who can bring challenging ideas and inspiration.” Most of all, Michal wants his research providers to become business partners. For this, they need to hire people with new skills, influences, and a business background. He feels that suppliers should also focus on building long-term relationships, and that they should synthesise all the knowledge they have and share it with their clients.
Prove our value
Some sectors have embraced market research more than others. In Romania, automotive and construction simply cannot afford to invest more, says Serbanica, as they have been significantly impacted by the economic crisis. She adds that all sectors are challenging the research agencies to revamp their services to fit into budget limitations. “This might explain why online, CATI and CAPI studies continue to increase.”
In Lebanon, Ammar witnesses a growing uptake of research on the part of Lebanese companies across all sectors. However, many industries are not yet heavy users of research, including (the government-owned) telecom, ISPs, hotels, service sectors (including the many resorts) and even real estate (the second largest economic sector in Lebanon). “I believe it is our role as research professionals to show and prove the value of our work to these industries,” he says. He also blames quick and dirty research for damaging his industry’s reputation.
Although the multinationals in the FMCG sector have always embraced market research as a core part of the marketing mix, it’s the more recent users in the Middle East – financial, telecom and automotive – that are getting the most from their research programmes, according to Hamilton-Clark. “Tier two and local FMCG companies are the most creative in professionalising and growing their businesses through the intelligent application of consumer research programs.” The one core sector yet to be fully leveraged is media research – specifically, television audience measurement.
Early stages
Despite all the progress, the market research volume is still very modest in Lebanon, with an estimated US $5 million (excluding work outside of Lebanon) – almost US $1 per capita. “There is still long way ahead for our industry,” admits Ammar. As for the other Arab countries, he observes that they haven’t had real elections yet, and opinion polling is still in its early stages. Overall, Ammar feels that the reputation of market research in Arab countries is slowly improving. What’s needed first, he urges, is a professionalisation of the industry. “It is important to position market research as a profession and a recognised business. Today, anyone can open a market research company, but not an accounting firm.”
Competition has increased in the Middle East, observes Hamilton-Clark, not just in market research, but across all sectors. Many local and regional companies are increasingly using consumer research, and more recently the government sector, especially in the UAE, is measuring, monitoring and managing change through large-scale customer satisfaction research programmes. “Overall,” he concludes, “marketing research is accepted as a way to create value for users.”
Jiří Michal is manager consumer insights and strategy at Kraft Foods in the Czech Republic. Steve Hamilton-Clark is CEO of TNS Middle East & North Africa. Alina Serbanica is senior vice president of global RAES at Ipsos Interactive Services. Tarek Ammar is CEO and co-founder of ARA Marketing Research & Consultancy
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Emerging Markets Rule, by Mauro Guillen and Esteban Garcia-Canal
Jan 11, 2013 by Peter Vanham
Will 2013 be the year in which EM multinationals become the real role models of the global marketplace? The authors of Emerging Markets Rule certainly think so. They say leading EM companies will inspire their peers around the world with alternative ways of doing business.
“What began as a necessity – a kind of guerilla warfare against the corporate superpowers – has now evolved into best practices and is on its way to becoming what everyone needs to know,” write the authors, Mauro Guillen and Esteban Garcia-Canal, management professors at Wharton Business Shool and the University of Oviedo in Spain, respectively. “Simply put, down is up. The weak have become the strong.”
Among others, the authors cite Haier of China, which became the world’s biggest appliance manufacturer in less than 30 years, Orascom of Egypt, which has made itself a $5bn telecome provider by running operations in countries like Bangladesh, Congo and North Korea, and Bimbo of Mexico, the world’s biggest baker. How have they done it?
For Guillen and Garcia-Canal, the only conclusion is that these companies have created a business model of their own, different from those used by DM multinationals. Coming from countries that lag behind on development, they had to be particularly bold, resourceful and smart to succeed. But once they overcame their initial challenges, they were ready to thrive abroad.
Orascom, for example, was used to dealing with faulty infrastructure and authoritarian regimes right from the start. It learned the lessons of providing services in Egypt and had no fear of doing the same in Congo and North Korea.
Haier, for its part, at first faced a seemingly insurmountable challenge in the US: to gain market share by competing with incumbents like Whirlpool. Instead of going head-to-head, it went for a niche market: student fridges. That helped it gather market knowledge, sales and brand value to build on.
Bimbo, probably the most famous of the examples, has long been a market leader in Mexico and much of Latin America. But it became the world’s largest bakery when it surpassed and then bought Sara Lee’s bread division. Its focus on execution, rather than strategy, made the difference, as well as the fact that its time horizon was much longer than that of publicly-listed Sara Lee.
There are plenty more such examples in emerging markets, write Guillen and Garcia-Canal. They summarise the secret recipe of these companies’ business models in seven axioms, illustrated by real-life cases. They are:
- Dive right into new ventures instead of strategising about them first; it will make you learn and grow more quickly, and keep your focus where it should be: on execution (like Bimbo and its bread)
- Use guerrilla tactics if a head-to-head with the incumbent is too hard (like Haier’s fridges)
- Whatever your industry, aim to build worldwide scale, because you’ll need it (like Samsung of South Korea in the mobile phone market, or Arcor of Argentina in the confectionary industry)
- Embrace chaos (political, market) – don’t run away from it (like Orascom);
- Use M&A as a stepping stone, not as a way to showcase your strength (like Geely, which Volvo for access to Europe – not like GM, which bought it as a “prize”)
- Expand to new markets at the speed of light, instead of incrementally and over several decades (not like IKEA or McDonald’s, which took decades to leave their home market)
- And: always be prepared to adapt to changing environments, even if it goes against decades of experience.
In all, it is refreshing to see that the authors recognize a fundamental truth: best practices, knowledge and expertise can come from around the world, including the so-called developing countries. It’s also good to see a chapter on how to use EM best practices to your own advantage.
But in their enthusiasm to shine a positive light on EM companies, the authors sometimes tell some less actionable stories, too.
It is nice to know, for example, that Samsung was able build up gigantic scale thanks to government-sponsored mega loans, up to 25 per cent of which were waived. But other than for a few lucky South Korean chaebols, this is a hard trick to learn from. And apart from that, what is there about the Samsung success story that others can repeat?
Yet Emerging Markets Rule is an easy and inspiring read. It aggregates success stories of EM multinationals, distilles the key learnings and insights, and reaches a daring but persuasive conclusion: EM multinationals will not only be the dominant players in almost every industry, they will also become the companies to learn from. Given the sometimes meteoric but mostly sustained rise in importance of EM companies in many different sectors, that conclusion provides at its worst a daring, differentiated angle to look at the business world order, and at its best the most important lesson for businesses competing in the 21st century global market.
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