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  • Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 12/31/2013

How to do business in emerging markets such as South America and China? 

Business in emerging markets
In spite of the risks involved, companies around the world continue to expand their operations into emerging markets, seeing it as key to their future success. The spur behind this trend however, is no longer just about lower production costs; rather it is about staking an early claim, developing long-term revenue sources, and increasing global market share.

Developed markets are simply no longer offering the same growth potential as emerging markets. The world’s biggest emerging markets at present include the BRICS and MIKT countries, namely Brazil, Russia, India, China and South Africa (BRICS), and Mexico, Indonesia, South Korea and Turkey (MIKT).


By far the two largest emerging markets are China (excluding Hong Kong and Macau) and then India. Established in 2010, the ASEAN–China Free Trade Area is the world’s largest regional emerging market, with Latin America also proving notable. A key factor to making it in emerging markets is to get in early.

Expanding operations into emerging markets

These markets are characterised by extreme competitiveness – right now more so than established economies – and so the company that moves in quickly and builds up its customer base and brand recognition has a definite edge over the newcomer.


Local intelligence is vital to any business wishing to expand its operations into an emerging economy. Almost all international companies that have expanded into emerging economies, when asked what they would do differently if they were to start over, point to paying more attention to local business mores and conditions and having better market intelligence from the outset.


Since each emerging market is so different, companies need a local guide who can help them navigate the political, financial, cultural and business differences of that particular nation, thereby helping them avoid unnecessary fees, fines, delays, and other time- and cost-consuming complications.

Growth potential for future success

So while it’s important to get in early with these markets, it’s equally important that you undertake thorough due diligence first, getting to know the local terrain so as to avoid missteps. Professionals with local knowledge can help a company avoid bribery and corruption as well as dealing with bureaucracy; some of the most significant challenges when doing business in emerging markets.


Moreover, governments can often pose other problems, such as unclear trade legislation, and frequently changing regulations. Without the help of a local consultant one can quickly and unwittingly run afoul of the local authorities. Other difficulties companies face when working in emerging markets are supply chain problems and delays, poor infrastructure, and a dearth of skilled workers.


South America is a fast-emerging region with many opportunities for new business. According to The Diplomatic Courier’s ‘A Tale of Two Cities’, “four-fifths of Latin America’s 589 million people reside in cities”, so there are large, accessible consumer populations.

Doing business in South America

One of the biggest obstacles to foreign enterprises engaging in these markets is political paternalism and direct interference, with Argentina in particular ranking extremely low with regard to this matter in the World Bank’s Doing Business 2014 data for Argentina, published in October 2013.


South American interregional cooperation and trade agreements are also struggling. According to Jared Mitchell in his 2013 report on Why emerging markets are tough to enter.


Brazil, the alpha nation among South America’s emerging economies, is plagued by inconsistent bookkeeping and its central bank places strict regulations on certain money transfers, which can slow business transactions considerably, even leading to deal-destroying delays of weeks.


Its infrastructure development is also unable to keep up with other advances; with city transport a major problem. But one of the biggest pulls to doing business in Brazil is its massive domestic market – roughly 206 million people. Moreover, its position of regional dominance and its deep wealth of natural resources are attracting much foreign investment.

Opportunities for new business in China

The draw-card to investing in China is obvious: the world’s largest domestic consumer base, extremely low production costs, and bountiful natural resources. Moreover, according to the Beijing Times’ 2013 report, IMF Lowers China’s Growth Forecast in 2013 at 8 Pct, the International Monetary Fund (IMF) announced a growth rate forecast of 8%.


The country also continues to invest heavily in ambitious and extensive road, rail and port projects. China certainly is the global powerhouse of economic opportunities, but what of the obstacles that need to be overcome by foreign investors for their business to flourish?


At present, intellectual property rights in China are not properly protected. According to Niraj Dawar, professor of marketing at the Richard Ivey School of Business:


“In emerging markets such as China, your [intellectual property] may be compromised, and litigation may or may not get you back your rights to your brand, your products or your technology.“

Attracting foreign investment

Competition is also extremely intense – perhaps more so than anywhere else in the world. Says Dawar:


“When you go into a market like China […] you’re competing with products that come from all over the world, and they’re all there trying to capture a share of it. The intensity of the competition is much greater in Shanghai than it is in Chicago.“


Once again, a company’s ability to be the first in can prove a major advantage when operating in this emerging market. There’s always a great deal of uncertainty with any business venture in an emerging market.

The importance of due diligence

While developed markets are characterized by regularity, exactitude and timeliness, doing business in emerging markets requires patience, if nothing else. Operations in the latter are not yet as slick and regulated as in the former, even though progress in this area is certainly being made in some regions, such as South America.


The rewards for engaging in the emerging market are potentially huge, but any endeavour needs to be entered into wisely, with proper consideration being given to all the points mentioned above.

 

Christophe Bernard

Christophe Bernard
I am a KPMG partner based in the French firm’s Paris office, responsible for encouraging the growth of our firms’ middle markets practice across Europe, Middle East and Africa, a majority of that market comprises of family businesses.
 

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