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The road to nowhere

Emerging markets offer many challenges, some of which are very different in
nature from those found in developed economies, while others are simply
different in scale.

In evaluating the risks, it’s worth learning from the experience of Malcolm
Wyman, FD of the brewing giant SABMiller. His company has made acquisitions or
entered into joint ventures almost everywhere from Colombia to China, with a
bias towards countries that are hardly renowned for their economic or political
stability. In evaluating an opportunity, the risk-appraisal process doesn’t try
to forecast what’s going to happen, Wyman explains. Instead, he says: “We’ll run
multiple scenarios to try and build in the risk and we won’t try and guess which
one is going to be right. What we’ll do is take a couple of scenarios – such as
what are the risks around them? Which do we believe are likely? – and then we’ll
price [the deal] accordingly.”
Here’s a handful of the risks that need to be borne in mind.

Political & economic risks

One of the risks that businesses face in emerging markets is that they can be
more vulnerable to economic shocks than deeper, more mature economies.

Major currency swings, surging oil prices, sudden outbreaks of disease, or
consumer markets ‘spooked’ by bank failures can all cause great problems in
countries from Argentina to Thailand.

But there’s good news. The 2005 annual report of the Bank for International
Settlements – the central banks’ central bank – says, however, that emerging
economies are becoming more resilient these days. After a period of economic
growth, it found that many countries now have:

– Stronger domestic growth (which helps offset any export weakness);
– Better government budgetary positions; and
– More stable inflation on the back of more credible monetary policy.

Likewise, a report by the Economist Intelligence Unit, CEO Briefing:
Corporate priorities for 2006 and beyond
, also argued that the most dynamic
emerging markets are becoming less volatile as growth continues and as reform
and liberalisation programmes roll out.

There are still dangers. The collapse of the tiger economies in the late
1990s showed how quickly the wheels can come off the economic juggernaut, while
the outbreak of SARS impacted on business travel to China a few years ago.

In both China and India, the authorities are concerned about the growing
disparity between the fast-growing, increasingly wealthy industrial and urban
areas, while poverty is still at unimaginable levels in the rural
districts.While China has the most profoundly Communist government, India has
the world’s largest democracy: similar grounds for discontent on the part of the
rural poor could manifest themselves in quite different ways.

Alun Jones, partner in charge of PricewaterhouseCoopers’ emerging markets
practice in the UK, agrees that there is greater stability in emerging markets:
“As the growth benefits the population more widely, then you should see some
increased stability through greater consumer satisfaction.” But, he adds: “One
of the things that happens is that people then see more of the disparity between
the haves and the have-nots and that can create instability.”

Trading partners

Joint venture or go-it-alone? A perennial problem when considering how to
enter a new market, not least when language, culture and management skills are
all very different from what you are used to.

“Going in completely fresh means you don’t have any bad baggage, but you do
have to make all your own relationships,” says Jones, “from making sure your
utilities work 24/7 and that you have the local party official on board.”

He adds that there is a greater propensity in these markets for local firms
to have “less integrity” when working with westerners than with fellow
nationals. All the more reason, then, to work as hard on the business and
personal relationships as on the cold logic of the strategy.

Work that his firm has done to ensure that licensors are being paid in full
has unearthed great volumes of ‘under-reporting’ by licencees – in amounts
typically equal to about 16 times PwC’s fees, Jones says.

Aside from all the usual problems that can develop between joint venture
partners, there can also be problems in which ‘related party transactions’ can
affect the profitability of a deal. It may suddenly become apparent, for
example, that a key supplier who is making excessive pricing demands is, in
fact, partly-owned by your JV partner.

In other instances, there is simply a difference in approach to corporate
governance. A senior manager in the Shanghai office of a JV between a US
advertising agency and a local firm said that the Chinese partner didn’t see any
need to pay its half of the Sarbanes-Oxley compliance costs for which the US
partner was liable.


There are all sorts of reasons to avoid litigation in emerging markets. The
relative immaturity of the legislation or case law, particularly where
commercial, property or insolvency laws are concerned; the glacial pace of legal
process; and the uncertainty of the outcome in court. Better to have
international arbitration clauses in contracts, though even then it can be a
lottery as to whether they are recognised or enforceable. The European Bank for
Reconstruction and Development gave a presentation with KPMG recently in which
it advised delegates to be both principled and pragmatic when seeking redress,
adding that “reconstructions, workouts and amicable solutions are the preferred

It’s also imperative to think about how you can protect your intellectual
property. Anyone in the business of making things other than luxury goods or
easily-copied DVDs and software might think that this isn’t a real worry for
them. Think again. An Economist Intelligence Unit report in 2004, Coming of
Age: Multinational companies in China
, said that there was a factory in
China producing 100,000 rip-off Volkswagen Jettas. Almost incredible.

The perils of corruption and bribery loom large and companies will have to
determine their policy at the outset, if only to avoid making early mistakes
that become difficult or impossible to reverse out of. Managers whose companies
are, by virtue of being subsidiaries of US companies, subject to the US Foreign
Corrupt Practices Act would do well to remember that the discovery of any
unacceptable practice is likely to result in US investigators being unleashed
against almost the whole of the rest of the company, anywhere in the world.

Corporate governance

Different business cultures have different approaches to financial controls,
which can create difficulties in trying to conduct due diligence in the
acquisition process, as well as in the post-acquisition phase when local
managers have the buyer’s big system imposed on them. Many of our following case
studies make the point about the need to get local managers to buy into the
process and again, that involves a process of building up trust as well as
putting effort into training.

Easier said than done, though, as, in many jurisdictions, the role of finance
– and the financial director – is seriously underdeveloped. Accounting often
means little other than bookkeeping, usually for regulatory or tax purposes or
to keep track of debtors. Apart from that, the books serve little purpose as
part of the management decisionmaking process.

Of course, the biggest risk surrounding emerging markets may well be the risk
of missing out altogether. Or as Malcolm Staff, managing director of Halifax
Fan, puts it: “Leave your cultural mistrust at home. It hinders you from making

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