The crisis has been a different one for China and India. Both have come out of it relatively unscathed and strong growth continues apace with growth rates in these regions projected to be of 8% and 6% respectively for 2010. It has even been said of China that it: "had almost enjoyed a good crisis" as unsustainable growth levels built on manufacturing and exports were slowed, and China now looks to balance its economy and encourage domestic spending and consumption. India has seen a drop in demand for IT and other services, but the recently-elected government promises reforms to make Foreign Direct Investments (FDI) flows into India easier.
With growth expected to remain fairly weak in many developed countries, it has become increasingly important for companies to consider how best to capitalise on the opportunities for growth offered by markets such as China and India. For different companies and organisations, some thriving, some surviving; others starting to come out of the other end of this crisis and beginning to look to the future; this means different things.
A multi-national corporation will have reviewed or be reviewing their international strategy and will be considering how to address issues such as:
- Controlling transfer risk: The need for transparency around overseas operations is undoubtedly higher in times of economic trouble, businesses can try to improve their creditworthiness and manage borrowing costs through pro-active analysis and evaluation of overseas operations and assets, effective risk management and independent rating reports / business reviews.
- Operational Challenges: Transparency and early risk detection: A crisis also brings with it risk of financial crime and industrial espionage. Businesses need to become more transparent to their business partners and suppliers, seeking to ensure early information and adequate risk provision.
- Business strategy abroad: Decision-making in the new environment: For many businesses, the changed market and competitive conditions mean that planning models and financial forecasts can boil down to two simple question: how to obtain a good return on investment in a relatively low growth environment and what level of international activity can my cash-flow support.
- Cash flows: Managing tax to maximise cash and liquidity: Aligning tax strategies to conserve and free cash, maximise cash flows and flexible use of available liquidity.
- Divestment: Exit compliance: Cutting back or surrendering business activities abroad can also have a negative effect on tax rebates and investment subsidies already granted at the foreign location. Proof of tax and regulatory compliance is required at all times.
The primary reasons for accessing 'emerging' markets have become more compelling as a result of the crisis. Whether it's to access the major geographies which have high savings rates and low penetration by the financial services industry or increasingly higher consumer spend potential because of rising affluence; or whether it's to reduce current costs of delivery through better sourcing - the strategic imperatives should be time or business cycle agnostic.
Depending on the firm's cash position and credit lines, now is the time to be considering a push into these markets because the costs of doing so are cheaper than they have been. Valuations have dropped and the opportunity for sustainable revenue growth and cost saving is significant. A Western business may bring technology or in the case of retail, a brand name, to the table when approaching a firm in a high-growth market to create a joint venture. This can be a very attractive win-win proposition.
The world must brace itself for a new wave of investment from East to West. China is actively looking for investment opportunities for its US$2 trillion foreign currency reserves. We will see established global brands facing competition from Chinese/Indian brands in their home territories.
Of the top 20 global companies in 2009, ranked by market capitalisation, six of these are Chinese companies, as in fact are three of the top four! Yet just five years ago, there were no Chinese companies on this list. You can draw your own conclusions from this statistic.
Chinese investors were initially thought to be primarily price-conscious and bargain hunters, likely to be attracted to distressed assets in the West. This has largely been a misconception as whilst it is true that the Chinese drive a vey hard bargain and want exceptional value for money, they are unlikely to have the know-how, local resource or management teams to take on distressed companies. They would rather invest in a good brand that is operationally sound.
Indian companies, whilst notoriously entrepreneurial and hugely ambitious, have been cautious as the crisis has developed. Having seen their esteemed flag-bearers suffer setbacks with some of their overseas portfolios, they have understandably taken a step back before following suit and going global; but this will surely happen.
- Companies with a recent acquisition in High Growth Markets, who may now need to rethink their local strategy / cash generation / market position etc.
- Companies under pressure, who are implementing cost reduction programs and who could succeed in this by outsourcing to High Growth Markets
- Companies with multiple foreign subsidiaries who may need to readjust their tax strategy around international cash flows
- Robust companies, who may want to seize the opportunity (offered by more realistic valuations in HGM) to enter a new market / accelerate their growth strategy in certain markets / capitalize on weakness of local or other foreign competitors in certain sectors
- Distressed companies who need to maximise their cash flows / repatriation from subsidiaries abroad or in need of exit strategies in certain foreign markets.
- China/India teams within the High Growth Markets Practice work with KPMG's member firms from these markets to offer THE only truly client-centric perspective on the client's European strategy: that being ELLP
- Ability to present live JVopportunities to European business looking for market entry options. Working with SCI teams in China/India, we can vet and shortlist potential partners for growing their business.
- Our ELLP China and India teams have been in the market for some time now having advised on over 100 deals in each corridor.
- A global network of member firms with strategic assignees posted in key markets to help develop inbound/outbound activity.
