Broad Street Capital Group’s new assignments in Ukraine total over $300 million

Ukraine - Proprietary Fi180 Country Profile - page 1 of 4(June 15th, 2016, London, UK)  Broad Street Capital Group announced today that it will act as the Financial Developer and Exclusive Financial Adviser on two complex, high-profile financing assignments in Ukraine. The underlying projects for these assignments deal with Ukraine’s energy security, food security and infrastructure development.

In the first assignment, Broad Street Capital Group , will serve as the Project’s Financial  Developer, and will be part of a mandated financing consortium, which will consist of a major banking institution, a Development Agency of the US Government, a US lending trust and an internationally renowned law firm.  The financing consortium will evaluate and structure a cutting-edge $250 million capital markets transaction to finance US supply and construction contract to build a national energy safety facility to be located in the Kyiv region of Ukraine.

In the second assignment, Broad Street Capital Group will serve as the exclusive Financial Adviser, whose role will be to secure up to $75 million in long-term debt financing, provided by a development agency of the US Government.  The funding will be part of the financing required to develop and construct a major grain terminal in the Odessa region of Ukraine.

“We are delighted to serve as financiers for these two cutting-edge projects” stated Alexander M. Gordin, managing director of Broad Street Capital Group. “Our assignments should serve as catalysts and spark broad-based financing of worthy infrastructure projects. The financing climate in Ukraine has been extremely challenging over the last few years, but despite continued difficulties, the prognosis is quite optimistic. We look forward to being part of Ukrainian financial renaissance, as that country rebuilds itself and finds a way to regain its economic footing.”

 

About Broad Street Capital GroupWP_20130620_022

Based in the World Trade Center’s Freedom Tower in New York City’s financial district, Broad Street Capital Group is an international private merchant bank, which since 1988 has served several foreign governments, multiple state-owned companies, as well as SMEs in emerging markets. The Firm focuses on arranging project financing in the $50-500 million range, providing political risk mitigation, export management services and cross-border market development advisory. Although the Firm has clients ranging from Bangladesh to Oklahoma, its primarily geographic focus is on the countries of Eastern and Central Europe and Central Asia.

The  firm works closely with all trade and development agencies of the U.S. Government and Export Credit Agencies of several European and North American countries.  Since its inception, Broad Street Capital Group has been involved in several high-profile cross-border transactions in IT/telecom, aerospace, healthcare,  energy generation, food security, nuclear safety, hospitality and franchising sectors. The firm’s current advisory portfolio exceeds $675 million.  For more information, please visit www.broadstreetcap.com, or contact Rustem Tursynov at info@broadstreetcap.comBroadStreetCapitalGroupServices_Page_1

Broad Street Capital Group announces major expansion campaign

Broad Street Capital Group announces major

expansion campaign to meet surging demand for

its ExportBoost™ program.

18 Merchant Banking Offices to open in multiple countries

in the next 18 Months

 

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US Businesses Are Freaking About Sanctions Against Russia

BusinessInsider CARL SCHRECK, RADIO FREE EUROPE/RADIO LIBERTY

When thousands of fans packed Helsinki’s Hartwall Arena this week to rock out to the music of U.S. industrial metal band Nine Inch Nails, they likely gave little thought to the Russian industrialists who own the venue.

Not so the organizers of the concert, who had to reckon with the fact that the arena’s three owners — billionaire associates of Russian President Vladimir Putin — have been hit with U.S. sanctions in response to the Ukraine crisis.

Ensuring the show can go on is something many U.S. companies and entrepreneurs are wrestling with as they try to determine whether they are unwittingly violating U.S. sanctions. In doing so, they often find themselves entering a legal minefield as they try to make sense of the Russian business world’s often Byzantine ownership structures.

“It is a huge concern,” said Serena Moe, a sanctions expert with the law firm Wiley Rein in Washington.

The complex chains of ownership and control that permeate the Russian economy are causing jitters among U.S. businesses in a range of sectors, including energy, banking, and entertainment, according to Washington-based sanctions lawyers who spoke to RFE/RL.

The attorneys say current and prospective clients — ranging from small firms to multinational corporations — have been peppering them with Russia-related inquiries ever since the Kremlin’s annexation of Ukraine’s Crimean peninsula in March.

“We’re getting probably five or six a week,” said Rebecca Hartley, a sanctions lawyer with the law firm Bingham in Washington.

Cortney O’Toole Morgan, a lawyer at Husch Blackwell, said her firm has received three or four calls from companies concerned about murky Russian ownership structures, including from a talent company staging performances throughout the world.

“They’re trying to figure out whether those can still go on and where the funding’s coming from,” she told RFE/RL.

So far the United States has sanctioned senior Russian officials and wealthy businessmen seen as close to Putin, as well as several companies, while holding off on broader sanctions targeting sectors of the Russian economy.

But the wealth and influence of the sanctioned individuals alone has prompted U.S. businesses to examine their connections in the country.

“Typically…my clients don’t transact with a Vladimir Yakunin. They transact with entities in which he may have an interest,” said Richard Matheny, a partner at the law firm Goodwin Procter who has been contacted by about a dozen clients about the Russia sanctions.

Yakunin, the influential head of Russian Railways, is among the 45 individuals and 19 firms that the Obama administration has slapped with asset freezes and U.S. visa bans in response to the Crimea annexation and what the Obama administration calls Russia’s destabilization of the situation in Ukraine.
ALSO READ: From ‘Darth Vader’ To ‘The Wolf’ — A Who’s Who Of Putin’s Sanctioned ‘Insiders’

Others include billionaire brothers Boris and Arkady Rotenberg and oil trader Gennady Timchenko, who together purchased the Hartwall Arena in Helsinki last year. The U.S. Treasury Department has said the three men, whose wealth has soared during Putin’s 14 years in power, are part of the Russian president’s “inner circle.”

“Where you’ve got the individuals who are themselves extraordinarily wealthy and invest widely, any potential investment has to be looked at hard,” said Moe, a former deputy chief counsel with the Treasury Department’s Office of Foreign Assets Control (OFAC), which administers and enforces economic sanctions.

The 50-Percent Rule

Once an individual is placed on an OFAC sanctions list, it becomes illegal for U.S. citizens and businesses to engage in transactions with entities in which that individual has an ownership stake of 50 percent or more.

If the sanctioned individual’s stake is less than 50 percent, U.S. citizens and companies are allowed to do business with the firm, even if even it is owned by several sanctioned persons whose cumulative stakes exceed 50 percent but whose individual stakes are less.

The Treasury Department nonetheless has the authority to sanction entities it deems to be controlled by sanctioned individuals, even if they do not formally own a 50 percent stake.

For U.S. companies, the key question is often whether the efforts and resources — from surfing the Internet to employing on-the-ground investigators — required to nail down details of ownership are worth the effort, sanctions lawyer Erich Ferrari told RFE/RL.

“The difficulty is determining: ‘How far do we go with this, and at what point does it become too cost-prohibitive for us?'” said Ferrari, adding that his firm is receiving “a few” inquiries a week from companies concerned about the Russia sanctions.

Rock On

In the case of the Hartwall Arena in Helsinki, the Internet appears to be sufficient to provide basic information about how the venue’s ownership is structured.

The website of the Finnish company Arena Events states that the company owns 100 percent “of the C-shares of Helsinki Halli Oy, which owns and operates the Hartwall Arena,” thus giving Arena Events “control and voting rights in shareholder meetings.”

Arena Events, meanwhile, is 50 percent owned by Langvik Capital, a Finland-based investment company owned by “the Rotenberg family,” and 50 percent owned by a Luxembourg-based company owned by Timchenko, according to the site.

A presentation given in early March by Boris Rotenberg’s son, Roman Rotenberg, provided a visual of the arena’s ownership structure.

The presentation, dated March 4, features a flow chart indicating that Langvik Capital and Timchenko’s Luxembourg-based company each own a 50 percent stake in Hartwall Arena.

However, Roman Rotenberg, chairman of the board of Arena Events, told RFE/RL in a May 10 e-mail that Hartwell Arena has “several hundreds of other shareholders.”

Rotenberg provided a breakdown showing that Arena Events — the joint venture owned by Timchenko and the Rotenberg family — owns 45 percent of the shares in the Helsinki venue.

The promoter of the May 8 Nine Inch Nails concert at the Hartwall Arena, Live Nation Finland, did not respond to an inquiry routed through its California-based parent company, global concert giant Live Nation Entertainment, in time for publication.

Live Nation Finland chief executive Nina Castren told Reuters last month that the promoter was “examining the possibility whether this could have an impact on American artists’ shows.”

Days later she said the U.S. sanctions “will not have an impact on Hartwall Arena nor our business there,” Reuters reported.

The Treasury Department declined to comment on the matter.

U.S. pop star Justin Timberlake is scheduled to play the 13,000 seat Hartwall Arena on May 11, while American acts Aerosmith and Miley Cyrus are slated to perform there later this month.

Representatives for Nine Inch Nails and Timberlake did not respond to requests for comment.

Read more: http://www.rferl.org/content/sanctions-american-companies-jittery-russian-business-ties-us/25380189.html#ixzz31PdQKHGj

How GE and IBM are Playing Global Development to Win

by Jonathan Berman, HBR BLOG

Most big corporations follow global development trends. Where there is economic growth, there is opportunity, and the companies that can predict where growth will take place are better positioned to take advantage of it. That is the reactive approach to economic development.

In the last few years, a more powerful dynamic has gained traction. CEOs are proactively engaging with emerging market government to spur economic development and create opportunities for their companies. In the fast growth markets of Asia, Africa and Latin America, national governments are responding to a more empowered citizenship, and looking for corporate partners to achieve their development goals. Companies that fill that need effectively are doing more than reacting to development. They are playing development to win.

General Electric is a good example. Four years ago, GE initiated a strategy to compete more effectively in Africa, one of the fastest growing regions in the world in terms of GDP. GE did more than take advantage of growth as it came. The company’s leadership moved proactively to accelerate it and shape it. “If we see a country where reward outweighs the risk, we want to invest,” CEO Jeff Immelt says in Success in Africa. GE spent months understanding the development priorities of countries where it planned to invest. Partnering with those governments, the company sought out discussions at the ministerial and head-of-state level to identify and work on the country’s most significant infrastructure challenges. The results are encapsulated in a “Country-Company MOU,” which describe key challenges the country faces and the role GE will play in helping meet them. For example, the two parties identified the challenge of national electrification and committed to work together to bring $10 billion of investment and 10,000 megawatts of new power online, along with local manufacturing and training. Emerging market infrastructure is a segment many Western companies have ceded to China, but GE is winning contracts because it is playing development to win.

IBM is doing something similar in data analytics. CEO Ginni Rometty took the top job in 2012, and identified Africa as a locus of technological growth early in her tenure. IBM identified a set of “Grand Challenges” facing the continent that could be addressed through superior data analytics, including water and sanitation, energy management, financial services, transportation, public safety, healthcare, and agriculture. Last month, IBM launched a dialogue with the government of Nigeria. It was co-hosted by the Minister of Technology and included ministers from the cabinet charged with meeting the Grand Challenges IBM identified. Rometty, on her second trip to the region in three months, led the session for the company. IBM is speeding the region’s growth, and helping shape its direction. That is playing development to win.

I recently spent some time with Bob Diamond, the former CEO of Barclays. Now head of Atlas Mara, he’s positioning the investment company to play development to win. Earlier this year, they raised $325 million in the public markets and this month acquired BancABC, a bank with operations in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe. “Governments want banks who will lend to businesses and homeowners,” Bob explains, “That’s what we intend to do. The private sector is growing in Africa and we plan to enable that in multiple countries.”

Playing development to win does have costs. It requires an up-front investment of money and time to understand the growth challenges within each host country or region and to establish the government and civil society relationships needed to act on those challenges. It also demands senior management and board involvement. Companies playing development to win have CEOs traveling to the region 2-3 times per year, supported by engagement of the full management team. Furthermore, the returns on investment are long term. For a large company, it’s common to invest for a decade or more before shareholders see material earnings. The anticipated scale of new business has to be large enough to warrant that.

Playing development to win should not be mistaken for corporate social responsibility (CSR). Sustainability and core values support any great company, but expanding long-term earnings by meeting big development challenges takes more. At a company that’s playing development to win, business units are leading the effort, enabled by sales, marketing, finance, supply chain management, CSR, and social investment.

Some might see playing development to win as cynical or undermining the cause of inclusive growth. It’s neither. Cynicism would be to bet against development. The companies playing development to win need the institutions and policies with which they are engaging to yield tangible results. If the government of Nigeria fails to deliver widespread, low-cost power, the fallout for GE will be significant.

Playing development to win will be the hallmark of great companies operating in emerging markets. Over the next decade, they will be the companies addressing the most pressing challenges in countries where the potential for growth is ripe. As a result, they will shape the landscape in which they compete, attract and retain superior talent, build stronger brands and enjoy stronger relationships with customers in the fastest growing global markets.

More blog posts by Jonathan Berman

Crimean Lessons for US Companies Doing Business Abroad

Protecting your business when crisis eruptsInternational political disturbances such as current events in Crimea and prior upheavals in, among others, Syria,Venezuela,Thailand, Kyrgyzstan, Egypt, Georgia, Congo, Iran and even Cuba always have profound effect on US businesses operating in the countries involved in those conflicts. Large US companies operating across the world have long learned to foresee and mitigate risks associated with politics, while small and medium-sized businesses (SMEs), not so much. This is at the time when US SME sector has undergone unprecedented international expansion fueled by low dollar exchange rate, reduced costs of telecom and travel, advances of the internet and growing demand for US products and services.

So what can US exporters, contractors, investors and franchisors learn from the Crimean conflict and what steps can they take to protect themselves from the next eruption in a seemingly safe international destination?

DO NOT PANIC!

This is by far the most important lesson. My business and I have survived three full-blown political crises, living through the fourth and have saw many significant government and policy changes, financial melt downs a half-dozen revolutions and a war in countries where we have had permanent operations, or business dealings.

First, protect your employees, corporate property and information. Start implementing contingency plans and have all non-essential personnel leave the country if the State Department issues travel warnings for the country you operate in. Stay in constant touch with the local US Embassy, or US Commercial Service. Analyze and reanalyze the news and information you gather from your private network. Look for signs of permanent shifts, if those are not present odds are any crisis will blow over and things will return to normal and in many cases lead to greater economic prosperity.  Some crises play out in days (Georgian war, GkCHP in Russia in 1991) some like Crimea look like they are long-term game changers and require a more fundamental reaction and adjustment of one’s business to be in sync with the new reality and with the modified US policy.

STAY INFORMED

Develop and cultivate multiple sources of reliable information. During rapidly breaking international events, there is a tremendous amount of white noise and inaccurate information pouring out of multiple sources. Social network posts, experts of various stripes appearing on TV, newspaper and magazine articles all putting their own spin on the events, with many being inaccurate and some just plain fake.  Thus it is important to distill several balanced general news, as well as trade sources to extrapolate accurate and timely information. For instance during Crimean crisis multiple US mainstream news sources were a day late reporting many important developments, so having reputable local sources (often available in English) is important.

Develop an informal network of Embassy and government agency officials, local chambers of commerce (AMCHAM) offices, bilateral councils, legal and financial professionals operating in the countries of interest. Initiate regular information exchanges and analysis sessions with members of your network. Join LinkedIn groups and actively monitor subject discussions. Ask yourself periodically if coverage you are receiving is correct and balanced. Make sure you understands all the issues and perspective of all sides involved in the conflict.

CONTINGENCY PLANNING

What happens if you have an order in route to a foreign country and a conflict arises there? What happens if your buyer is arranging credit and you have ramped up your production when sanctions are imposed? What happens if you, or your employees are in the country during the start of an unrest?  What happens if the ruling party changes during significant contract negotiations? What about a politically motivated change in leadership among your perspective customers, borrowers, and other interested parties?

To minimize your risks, you will want to keep your business, your person, and your information secure. That means at least taking common sense precautions in your daily business operations.  It also means that you have to be absolutely ready to  abandon your entire business in the foreign country at a moment’s notice. In the movie Heat, Robert DeNiro, playing the part of Neil McCauley, defined his survival strategy:  “Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.” A similar strategy should be employed when doing business abroad.

An effective survival strategy must always include contingency plans. These could include getting out of a country in a hurry whether via traditional or alternate routes, implementing a crisis management plan and hiring security, using medical evacuation insurance, or knowing where you can get access to  a few thousand bucks for when your wallet is lost, office ransacked, ATMs cease operating or Visa/Mastercard system is disabled. For exporters who have goods en route, or are n the middle of a contract production, know your rerouting options, alternative markets and formulate your plan in case the force majeure clause of your contract is invoked.

DO NOT SAVE ON LEGAL COSTS and PAPER ALL TRANSACTIONS PROPERLY

Small and mid size businesses generally despise lawyers (well certainly legal costs) and temptation is often to cut corners, re-use standardized contracts, distribution agreements and not go through with full legalization of property and asset acquisition in country. Often owners wish to remain hidden and transactions are done through intermediaries and sometime with “tax optimized” funds. BIG mistake. What will you do if a country has change of government, or worse yet the place where your company does business become’s another country (Crimea is just one of many examples of such transformations over the last 25 years.)  Use reputable lawyers both in the US and locally. Spend a bit extra upfront and have a piece of mind later on.

BUY INSURANCE!

In addition to commonly used freight insurance used by exporters, three specialized kinds of insurance are available to protect US companies and their employees venturing abroad:

Political risk insurance (PRI) – covers investors from such perils as political upheaval, currency inconvertibility and expropriation, creeping expropriation or nationalization of their assets. This type insurance also protects franchisors from loss of their royalty streams and protects contractors who are building international projects. Many private companies offer PRI, but OPIC – a federal agency tasked with financing and insuring American cos.’ investments abroad offers the most comprehensive and flexible policies for the money. MIGA – a unit of World bank is another potent source of PRI. Coverage is open in about 150 countries and we recommend it to all our clients venturing abroad.

It is important to consider PRI at the very early stages of the planned international investment or franchising process. Underwriting process is similar to that of a traditional loan and takes a few months.

Export credit insurance (ECI) – covers exporters from the risk of non-payment by the foreign buyers whether due from financial or political causes. It allows exporters to vastly expand their intentional business by offering open account sales with terms of up to 180 days. ECI policies range from an umbrella type of insurance covering multiple buyers to an individually tailored, albeit more expensive, single buyer coverage. Underwriting for ECI policies depends on the size of the proposed transactions and usually takes 1-2 weeks. ECI is offered through a number of private insurance carries and through the Export Import Bank of The United States (US Ex-Im).

Travel Medical Insurance (TMI) – covers business travelers against illness or injuries while traveling abroad. This type of coverage either permits subsidized or free treatment at authorized local doctors and hospitals, or when needed, allows for MEDEVAC evacuation to safe jurisdictions in case of serious injury

Fluent In Foreign Academy puts a series of bi-weekly educational webinars on selecting the right PRI, TMI and ECI solutions. To register for the upcoming sessions, please complete the form below:

International business is often very profitable and exciting, but events like the Crimean crisis remind of the perils and should force each and every one of us doing business abroad to reassess and augment our risk mitigation strategies and procedures.

Please email me with any questions you may have about making your company better prepared to deal with international crises – agordin@broadstreetcap.com

FI3Indices

Qatar and Australia tie for top ranking in the newly released Fi3F Index of most desirable countries for Franchisor expansion

as released by PRNewswire


NEW Fi3F INDEX™ RANKS APPEAL OF 180 NATIONS FOR WORLDWIDE FRANCHISE EXPANSION OPPORTUNITIES

Qatar and Australia tie for top ranking, followed by S. Korea and Singapore;

Additional Fi3 indices to rank country appeal for exporters and direct investors

NEW YORK, NY—Feb. 13, 2014–  Fi3F™, a new proprietary and forward-looking index that measures the attractiveness of 180-nations for franchisors seeking to expand internationally, is being introduced today by Fluent in Foreign™ LLC, a New York City advisory group that guides companies as they seek to establish or expand their franchise business abroad.

Fluent in Foreign is headed by Alexander Gordin, author of the international business guidebook “Fluent in Foreign Business,” which was published last summer by the Princeton Council on World Affairs.  The Fi3F franchising index is the first in a planned series of three indices The other two – Fi3E™ and Fi3I™ – are geared for Exporters and direct foreign Investors, respectively.

The Fi3F Franchisor Country Appeal Index™ evaluates each nation on 100 point scale using proven factors that include proprietary data combined with information obtained from the World Bank, United Nations, Transparency International and several U.S. government agencies.  The index looks at factors that include each country’s GDP growth, population size, education, availability of franchise financing, political risk insurance, corruption, investor protection and legal framework for contract enforcement and IP protection.

The top spot on the list is shared by the tiny Persian Gulf state of Qatar and Australia with each attaining the score of 85.7 out possible 100 points. In descending order, others on the top 10 list are: South Korea, Singapore, U.S., Malaysia, Canada, China, Mongolia and New Zealand. To get the full 180 country Fi3F list click Subscribe button on this page, or register your interest at http://www.fluentinforeignacademy.com .

Think you’ve got a strategy to enter the Chinese market? Think twice

By Yu Yongfu, TheNextWeb

shanghai
Yu Yongfu is the chairman and CEO of UCWeb, whose mission is to provide a better mobile Internet experience to billions of users around the world. Earlier in his career, he was a VP at Legend Capital. Yu graduated from Nankai University in 1999 with a bachelor’s degree in economics.
Whenever I visit the US, one question mobile entrepreneurs always ask me is ‘How can my startup break into China?’
The short answer is simple: Partnership. But finding the right local partner isn’t easy, and even if you do find one, gaining a foothold in the massive Chinese mobile market takes patience, insight, and strategy.

Seeing double

The biggest mistake most US entrepreneurs make right off the bat is in thinking of China as one market. In fact, in the mobile market, China is made up of two distinct markets.

Cities such as Beijing, Shanghai and Guangzhou are similar to the US; consumers in these urban centers are tech savvy, and there is a high percentage of iPhone and tablet ownership.

But outside of these cities, China’s mobile market is made up of millions of less affluent consumers who use low-cost Android phones and often don’t have access to high-bandwidth mobile connectivity. Market demand for this sector is best seen in the rapid growth of Xiaomi, a Chinese cell phone manufacturer who reported online sales of 100,000 mobile phones in 90 seconds for its sub-1000 yuan phone (about $130 US).

two chinese markets Think youve got a strategy to enter the Chinese market? Think twice

Such extreme differences between the two markets have made it difficult for US mobile startups to successfully enter China, even if they manage to partner with top local players.

But in order to succeed, US companies must have a winning strategy for both markets or risk losing out on huge opportunities.

The good news is US mobile startups often have an advantage over larger players in breaking into the Chinese mobile market. Startups are willing to explore a variety of partnership and strategy options to enter the market, and are more nimble and flexible to react to ‘hurdles’ when they appear.

Here are three steps can US mobile startups take to successfully grow their businesses across China.

The right partners

The first step is finding the right partner – one that understands your startup’s unique offer, has proven success in both Tier 1 and 2 markets, and is committed to growing your business alongside its own.

When partnering in China, don’t be afraid to get creative. GGV Capital matched a leading US player in the SaaS space with an emerging leader in China. The US company not only struck up a partnership but also ended up investing along side the venture firm in the Chinese company.

youku 520x345 Think youve got a strategy to enter the Chinese market? Think twice

Technology collaborations along the lines of the Qualcomm-Tudou partnership are another example of creative US-China partnerships.

Last year, my company, UCWeb, teamed up with Evernote in a ‘marketing partnership’ to help the US company gain a deeper understanding of the Chinese mobile web consumer in advance of its formal China launch later that year. These strategic relationships may not be traditional, but they have delivered positive results for all involved parties.

US startups can also gain a foothold with the Chinese government through strategic partnerships. For example, Microsoft is the first major US provider to launch a public cloud in China through a three-way strategic partnership with 21Vianet, China’s largest carrier-neutral internet data services provider, and the Shanghai Municipal Government

Cultural immersion

In order to understand the vast and complex Chinese business landscape, you must see and experience China for yourself.

Once you have tapped into all your US connections, the next step is to build your own relationships on the ground in China. There is no substitute for spending a regular and significant amount of time there.

156305046 520x346 Think youve got a strategy to enter the Chinese market? Think twice

When visiting China, it is essential that you forge your own path, both literally and figuratively; if you follow someone else’s agenda, you may miss the chance to discover an untapped opportunity.

Take the time to explore both Tier 1 and Tier 2 cities. Not only will firsthand knowledge of Chinese business strengthen your position as a partner, but it will trigger your creativity so you can develop fresh, unique approaches for different segments of the Chinese market.

Strategy shift

Finally, US startups must adapt their business strategies to the Chinese market. For US entrepreneurs, this requires parting with assumptions and accepting input from local partners when it comes to marketing, competitive analysis and cultural trends.

This could mean making a significant departure from your company’s US strategy, or a radical pivot from your current China strategy. Either way, without an open-minded attitude, US companies will fail in China.

One example of a US mobile company that is successfully adapting its product strategy to the Chinese market is Appcelerator. Thanks to its partnership with the China Software Developer Network (CSDN), the largest developer community in China, Appcelerator is building the next generation mobile platform for China’s mobile market.

With more than a billion mobile subscribers, China represents an irresistible opportunity for mobile-first companies to grow exponentially. In order to successfully incorporate China into a global mobile strategy, US entrepreneurs must drill down to the local level to reach both Tier 1 and Tier 2 markets.

This two-tier strategy may involve greater effort, creativity and flexibility, but it will surely result in richer rewards.

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As Emerging Markets Slow, Firms Search for “New” BRICs

by Richard Leggett, HBR.org

By all measures, emerging markets are having a tough year. The Economist bemoans their “great deceleration” and HBR featured a well-researched study on how multinationals are becoming less global. However, multinationals still expect their emerging market portfolios to deliver robust growth and increasing profits based on the memory of their performance in recent, more bullish years.

In this new operating environment, I find more and more multinationals looking to new frontier markets for growth while demanding profitability from their emerging-market operations. Using our 200+ clients as a proxy for global sentiment, I find the pivot towards profitability to be significant: 37% of MNCs are focused more on profitability than growth in emerging markets, up 16% from just last year.

To accommodate these new market dynamics, executives are adopting a dual strategy of “going deep” in the BRICs while simultaneously and aggressively pursuing the next frontiers.  Let’s see how this story is playing out in the different emerging market regions.

Asia Pacific

Asia offers a good example of this push to frontier markets. I remember a conversation I had with an executive in 2000. I asked which markets he was focused on outside of China and India. He responded, “for us, China and India are Asia.” It’s been awhile since I heard a similar response, as companies are now expanding aggressively into ASEAN (Malaysia, the Philippines, Singapore, Thailand, and especially Indonesia). This is the result of a growing and affluent middle class that supports private consumption and is bolstered by favorable demographics; over 50% of the population is under 29 years old and approximately 52% live in urban areas.

However, there are some risks. For example, on the Indonesian archipelago, supply chain and distribution logistics present serious challenges — with logistics costs at 24% of GDP, compared with the regional average range of 9-11%. Difficulty in distribution is not unique to Asia and reflects a global trend. According to our recent benchmarking survey of more than 100 senior executives, 94% of executives sell at least partially through distributors, accounting for about 50% of their revenue in emerging markets. Additionally, managing corrupt business practices often makes it difficult for MNCs to realize growth potential in the short term.

Latin America

As executives become more sophisticated in their understanding of these countries, they balance their focus between looking to expand in new markets as the old standbys–namely Brazil and Mexico–have recently slowed to disappointing growth rates. For example, Peru’s rising middle class offers an increasingly attractive choice for consumer goods and retail MNCs looking to diversify their investments beyond established markets.

Quantifying the impressive rise of the middle class, FSG calculates private consumption in Peru is set to grow 54% between 2010 and 2015. Real increases in personal income and access to credit will support growth across all retail categories, but the automotive, consumer electronics, and food and drink sectors will outperform, as consumer taste becomes more sophisticated.  The consumer sector has already begun its high-growth phase as over 36 new shopping centers have been built in Peru over the last 10 years. The three main grocery retail chains in Peru grew from 57 stores in 2001 to 155 stores in 2010.

Eastern Europe, Middle East & Africa

Eastern Europe, the Middle East, and Africa follow the same pattern of slowing growth in traditional strongholds, with opportunities in previously untapped frontier markets. In Russia, having made significant investments in the two largest cities, we are seeing companies expanding into regional markets by relying on third-party distributors, similar to the storyline in Indonesia. Growing beyond Moscow and St. Petersburg allows companies to build market share, strengthen their competitive position, drive profitability, and contribute to long-term sustainability in Russia – and it’s worth remembering that 64% of Russia’s GDP sits outside of the these two cities.

Sub-Saharan Africa is in many ways the last great frontier. Here multinationals are reacting to South Africa’s stagnant growth by looking to the hottest frontier markets globally: Nigeria and, to a lesser extent, Angola. The region has piqued executives’ interest, as it benefits from improving business conditions, demand for infrastructure projects, and a strong demographic profile.  Nigeria is especially attractive, as it is poised to overtake South Africa as the largest African economy afterits GDP grows 40-50% as a result of the government changing the way it measures GDP at the end of the year. Nigeria’s automotive industry is booming, as international car makers are expanding their dealerships and setting up local assembly plants.  Case in point: Ford is planning to introduce at least five new models after seeing a 33% increase in sales in the first half of 2013 in Nigeria. Mercedes-Benz and Skoda have recently expanded in the country with new showrooms and models.

In emerging markets, what began primarily as a growth strategy has evolved to a dual mandate of growth and profitability. Executives must act fast to capitalize on the final frontiers, while market share is still there for the taking. Although each region exhibits similar potential, success for multinationals will depend on identifying the most attractive opportunities for their unique businesses and adopting management best practices that account for the local nuances of each market.

China’s Coming Economic Slowdown

History shows that every economic miracle eventually loses its magic. How much longer can China sustain such astounding growth? 

The big question of the 20th century has not disappeared in the 21st: Who is on the right side of history? Is it liberal democracy, with power growing from the bottom up, hedged in by free markets, the rule of law, accountability and the separation of powers? Or is it despotic centralism in the way of Stalin and Hitler, the most recent, though far less cruel, variant being the Chinese one: state capitalism plus one-party rule?

The demise of communism did not dispatch the big question; it only laid it to rest for a couple of decades. Now the spectacular rise of China and the crises of the democratic economies—bubbles and busts, overspending and astronomical debt—have disinterred what seemed safely buried in a graveyard called “The End of History,” when liberal democracy would triumph everywhere. Now the dead have risen from their graves, strutting and crowing. And many in the West are asking: Isn’t top-down capitalism, as practiced in the past by the Asian “dragons” (South Korea, Taiwan, Japan) and currently by China, the better road to riches and global muscle than the muddled, self-stultifying ways of liberal democracy?

Workers at the Innovation Fulfillment Center at the Foxconn factory complex in Shenzen, 2010. China’s cost advantage is already plummeting; average wages have quadrupled since 2000. Tony Law/Redux

The rise-of-the-rest school assumes that tomorrow will be a remake of yesterday—that it is up, up, and away for China. Yet history bids us to be wary. Rapid growth characterized every “economic miracle” in the past. It started with Britain, the U.S. and Germany in the 19th century, and it continued with Japan, Taiwan, Korea and West Germany after World War II. But none of them managed to sustain the wondrous pace of the early decades, and all of them eventually slowed down. They all declined to a “normal” rate as youthful exuberance gave way to maturity. What is “normal”? For the U.S., the average of the three decades before the crash of 2008 was well above 3%. Germany came down from 3% to less than 2%. Japan declined from 4.5% to 1.2%.

What rises comes down and levels out as countries progress from agriculture and crafts to manufacturing and thence to a service and knowledge economy. In the process, the countryside empties out and no longer provides a seemingly limitless reservoir of cheap labor. As fixed investment rises, its marginal return declines, and each new unit of capital generates less output than the preceding one. This is one of the oldest laws of economics: the law of diminishing returns.

The leveling-out effect also applies to industrialized economies that emerged from a catch-up phase in the aftermath of war and destruction, as did Japan and West Germany after World War II. In either case, the pattern is the same. Think of a sharply rising plane that overshoots as it climbs skyward, then descends and straightens out into the horizontal of a normal flight pattern. The trend line, it should be stressed, is never smooth. In the shorter run, it is twisted by the ups and downs of the business cycle or by shocks from beyond the economy, such as civil strife or war.

Only hindsight reveals what has endured. In the middle of the “Surging Seventies,” Japanese growth flip-flopped from 8% to below zero in the space of two years. South Korea, another wunderkind of the 1970s, gyrated between 12% and -1.5%. As the Cultural Revolution burned through China in the same decade, growth plunged from a historical onetime high of 19% to below zero. Recent Chinese history perfectly illustrates the role of “exogenous” shocks, whose ravages are far worse than those wrought by a cyclical downturn. Next to war, domestic turmoil is the most brutal brake on growth. In the first two years of the Cultural Revolution, growth shrank by eight, then by seven, percentage points. After the Tiananmen Square massacre of 1989, double-digit growth dropped to a measly 2.5% for two years in a row.

The Cultural Revolution and Tiananmen hint at a curse that may return to haunt China down the line: the stronger the state’s grip, the more vulnerable the economy to political shocks. That is why the Chinese authorities obsessively look at every civic disturbance through the prism of Tiananmen, though that revolt occurred a generation ago. “Chinese leaders are haunted by the fear that their days in power are numbered,” writes the China scholar Susan Shirk. “They watched with foreboding as communist governments in the Soviet Union and Eastern Europe collapsed almost overnight beginning in 1989, the same year in which massive pro-democracy protests in Beijing’s Tiananmen Square and more than 100 other cities nearly toppled communist rule in China.”

Today, the world is mesmerized by awesome growth in China. But why should China defy the verdict of economic history from here to eternity? No other country has escaped from this history since the Industrial Revolution unleashed the West’s spectacular expansion in the middle of the 19th century.

What explains the infatuation with China? Western intellectuals of all shades have had a soft spot for strongmen. Just think of Jean-Paul Sartre’s adulation of Stalin or the German professoriate’s early defection to Hitler. The French Nobelist André Gide saw the “promise of salvation for mankind” embodied in Stalin’s Russia.

And no wonder: These tyrants promised not only earthly redemption but also economic rebirth; they were the hands-on engineers, while thinkers dream and debate, craving power but too timorous to go for it. Too bad that the price was untold human suffering, but as Bertolt Brecht, the poet laureate of German communism, famously lectured, “First the grub, then the morals.”

Harry Campbell

Today’s declinists succumb to a similar temptation. They survey the crises of Western capitalism and look at China’s 30-year miracle. Then they conclude once more that state supremacy, especially when flanked by markets and profits, can do better than liberal democracy. Power does breed growth initially, but in the longer run, it falters, as the pockmarked history of the 20th century reveals. The supreme leader does well in whipping his people into frenzied industrialization, achieving in years what took the democracies decades or centuries.

Under Hitler, the Flying Hamburger train covered the distance between Berlin and Hamburg in 138 minutes; in postwar democratic Germany, it took the railroad 66 years to match that record. The reasons are simple. The Nazis didn’t have to worry about local resistance and environmental-impact statements. A German-designed maglev train now whizzes back and forth between Shanghai and the city’s Pudong International Airport; at home, it was derailed by a cantankerous democracy rallying against the noise and the subsidies.

Top-down economics succeeds at first but fails later, as the Soviet model shows. Or it doesn’t even reach the takeoff point, as a long list of imitators, from Gamal Abdel Nasser’s Egypt to Fidel Castro’s Cuba, demonstrates. Nor are 21st-century populist caudillos doing better, as Argentina, Ecuador and Venezuela illustrate.

Authoritarian or “guided” modernization plants the seeds of its own demise. The system moves mountains in its youth but eventually hardens into a mountain range itself—stony, impenetrable and immovable. It empowers vested interests that, like privileged players throughout history, first ignore and then resist change because it poses a mortal threat to their status and income.

This sort of “rent seeking” is visible in every such society. As the social scientist Francis Fukuyama explains, reflecting on the French ancien régime: “In such a society, the elites spend all of their time trying to capture public office in order to secure a rent for themselves”—that is, more riches than a free market would grant. In the French case, the “rent” was a “legal claim to a specific revenue stream that could be appropriated for private use.” In other words, the game of the mighty is to convert public power into personal profit—damn markets and competition.

The French example easily extends to 20th-century East Asia, where the game was played by both state and society, be it openly or by underhanded give-and-take. Raising the banner of national advantage, the state favors industries and organized interests; in turn, these seek more power in order to gain monopolies, subsidies, tax breaks and protection so as to increase their “rents”—wealth and status above and beyond what a competitive system would deliver.

The larger the state, the richer the rents. If the state rather than the market determines economic outcomes, politics beats profitability as an allocator of resources. Licenses, building permits, capital, import barriers and anticompetitive regulations go to the state’s own or to favored players, breeding corruption and inefficiency. Nor is such a system easily repaired. The state depends on its clients, just as its clients depend on their mighty benefactor. This widening web of collusion breeds either stagnation or revolt.

What can the little dragons tell us about the big one, China? The model followed by all of them is virtually the same. But some differences are glaring. One is sheer size. China will remain a heavyweight in the world economy no matter what. Another is demography. The little dragons have completed the classic course. Along that route, toilers of the land, just as in the West, thronged the cities in search of a better life. This “industrial reserve army” held down wages, driving up the profit rate and the capital stock.

And so South Korea, Taiwan and Japan turned into mighty “factories of the world,” whose textiles, tools, cars and electronics threatened to overwhelm Western industry, as China’s export juggernaut does today. Once it empties out, the countryside can no longer feed the industrial machine with cheap labor.

China still has many millions of people poised to leave rural poverty behind, so don’t confuse it with Japan, whose shrinking and aging population won’t be replenished soon by immigration or procreation. Japan ranks at the bottom of the world fertility table, one notch above Taiwan and one below South Korea. Call it East Asia’s “death wish.” China’s “reserve army” still has a long way to go. Nor has this very poor country exhausted the classical advantages of state capitalism, such as forced capital accumulation, suppressed consumption and a cavalier disregard for the environment.

But beware the curse of 2015. Despite its rural masses yearning to go urban, China’s workforce will start to decline while its legion of graying dependents keeps ballooning—the result of an abysmally low fertility rate, better health and rising life expectancy. As China gets older, America will become younger thanks to its high rates of birth and immigration. An aging society implies not only a smaller workforce but also a changing cultural balance between those who seek safety and stability and those who want to risk and acquire—traits that are the invisible drivers of economic growth.

At any rate, China’s cost advantage is plummeting. Since 2000, average wages have quadrupled, and the country’s once spectacular annual rate of growth no longer registers in the double digits.

Discontent there, as measured by the frequency of “public disturbances,” is rising, but it is about local corruption and elite rent seeking, not about cracking the political monopoly of the Communist Party. One Tiananmen demonstration does not a revolution make. There is no shortcut to the mass-based protests that dispatched the tyrants of Taipei and Seoul.

Nor is there an imminent ballot-box revolution in China’s future. It took Japan’s voters a half century to dismantle the informal one-party state run by the Liberal Democratic Party, and this in a land of free elections. The Chinese Communist Party need not fear such a calamity; it is the one and only party in a land of make-believe elections.

And yet.

History does not bode well for authoritarian modernization, whether in the form of “controlled,” “guided” or plain state capitalism. Either the system freezes up and then turns upon itself, devouring the seeds of spectacular growth and finally producing stagnation. (This is the Japanese “model” that began to falter 20 years before the de facto monopoly of the LDP was broken.) Or the country follows the Western route, whereby growth first spawned wealth, then a middle class, then democratization cum welfare state and slowing growth. This is the road traveled by Taiwan and South Korea—the oriental version of Westernization.

The irony is that both despotism and democracy, though for very different reasons, are incompatible with dazzling growth over the long haul. So far, China has been able to steer past either shoal. It has had rising riches without slowdown or revolt—a political miracle without precedent. The strategy is to unleash markets and to fetter politics: “make money, not trouble.”

Can China continue on this path? History’s verdict is not encouraging.

This essay is adapted from Mr. Joffe’s “The Myth of America’s Decline: Politics, Economics and A Half Century of False Prophecies,” which will be published by Liveright on Nov. 4. He is the editor of Die Zeit, Germany’s most widely read weekly newspaper, and a fellow of the Hoover Institution and the Freeman-Spogli Institute for International Studies at Stanford University.

Afghan Business Tale: Don’t Try This

Take Earth’s Toughest Startup Conditions, Add Army Veterans, Then ‘Beat Your Head Against the Wall’

Dion Nissenbaum. WSJ.com

Matthew Griffin had an unusual swords-to-ploughshares business plan he hoped would help bring a measure of economic security to one of the least secure places in the world.

The shaggy-haired former Army Ranger wanted to hire scores of factory workers in Kabul to assemble flip-flop sandals from poppy-patterned soles and other Chinese-made parts trucked across Afghanistan’s unstable border with Pakistan. And, he wanted to decorate the straps with the butt ends of AK-47 shell casings, a detail he figured would appeal to trend setters in the U.S., where he planned to sell the finished footwear.

Afghan workers making the ill-fated first batch of Combat Flip Flops in 2012. Reuters

What could go wrong? For Mr. Griffin and his business partners at Combat Flip Flops, it turns out, just about everything.

The first batch of the flip-flops was a failure. The factory he hired on his second try went out of business before it could make a single sandal. Now, Mr. Griffin and his partners are setting up shop in Colombia, thousands of miles away from Kabul’s perch on the edge of the rugged Hindu Kush mountains.

“What a long, strange trip it’s been,” said 36-year-old Donald Lee , another former Army Ranger, who helped found Combat Flip Flops with Mr. Griffin, 34.

Afghanistan was once fertile ground for aspiring entrepreneurs who knew how to take advantage of the billions of dollars that flooded the country after the U.S. invaded in 2001. They succeeded in setting up Thai restaurants on military bases, beauty spas with armed guards and incense-scented yoga studios surrounded by blast walls. But making beach wear in a landlocked country?

While it isn’t uncommon to see Afghan soldiers or Taliban fighters wearing rubber sandals that they can slip off many times a day for prayer or before entering homes, a common courtesy in the region, Combat Flip Flops were aimed at a different clientele. The company’s slogan: “Bad for running, worse for fighting.”

“We wanted to take something 180 degrees from combat and make a product for people going to a beach and having a good time,” said Mr. Griffin. “Our flip-flops are weapons for change.”

Mr. Griffin got the inspiration for Combat Flip Flops in 2009 when he toured a Kabul boot factory run by John Boyer , a former U.S. Marine captain and Iraq war veteran who had no previous experience operating a manufacturing plant.

Mr. Boyer, 34, said he first came to Afghanistan in 2008 because he wanted to impress his then girlfriend with his sense of adventure. “I was young enough and dumb enough to go for it.”

Though he decided to help set up the boot factory, he said he thought that making boots for the Afghan army was a bad idea. Afghan soldiers kept their boots unlaced for easy removal at prayer times, and they didn’t really seem to like wearing them. So, Mr. Boyer helped design an alternative: flip-flops with combat soles from the factory line.

The U.S.-led military, which had invested millions of dollars in the local boot-making business, wasn’t interested in Mr. Boyer’s prototypes, but they were just the inspiration Mr. Griffin was looking for. Combat Flip Flops was born.

Mr. Griffin turned to China for cheap raw materials, but by the time the first supplies were ready to ship to Kabul, Pakistan had shut its border with Afghanistan to protest an errant U.S. attack that had killed more than two dozen Pakistani soldiers in November 2011.

Mr. Griffin had the shipment rerouted through Tajikistan into Kabul, where Mr. Boyer was preparing to produce the first 2,000 Combat Flip Flops.

Those flip-flops ended up being too poorly made to pass muster in the U.S. So Mr. Griffin gave them away in Kabul, got his money back and went back to the drawing board.

The second Kabul factory Mr. Griffin hired abruptly went out of business when it lost its major contracts with the U.S.-led military coalition.

After that Mr. Griffin had his flip-flop making supplies shipped from China to his home in Issaquah, Wash., where he spent hours with a hacksaw fruitlessly trying to cut thousands of AK-47 bullet casings for use on the flip-flops. He eventually resorted to using replicas.

Mr. Griffin and his friends then transformed his garage into a mini-factory that churned out 3,400 pairs of Combat Flip Flops. The flagship AK-47 style, which sells online for $65 a pair, features the replica bullet parts and a poppy design on the sole—a nod to Afghanistan’s reputation as a major heroin source.

For now, the company has given up on making flip-flops in Afghanistan and is instead pinning its hopes on a factory in Colombia, which Mr. Griffin says has “more security per square foot than any other country in the world.”

Despite all his setbacks, Mr. Griffin is willing to go to great lengths to promote his flip-flops. Earlier this year, he vowed to wear them for the traditional running of the bulls in July in Pamplona, Spain, if his company got 10,000 “likes” on Facebook. It got just 3,000, but he went ahead anyway, wearing the flip-flops for a short part of the run. Afterward, in the bull ring, he tried—and failed—to hang his sandals on a bull’s horns.

“Flip-flops are bad for running—and we proved it,” he said.

Combat Flip Flops is still looking to give Afghanistan a chance. The owners want to transform a shipping container into a mobile factory that they can set up in western Afghanistan. But the export route for the flip-flops would lead through Iran, which could be a violation of U.S. sanctions.

Mr. Boyer, whose factory in Kabul shut down last year after it lost its military contracts, is sympathetic to the company’s cause. “In Afghanistan you’ve just got to beat your head against a wall until you understand how things get done,” he said. “I’m just not sure whether flip-flips can happen anytime soon.”

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