Last week, I moderated a panel on multinationals in emerging markets for the London Business School’s Global Leadership Summit. Four prominent business leaders–Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte shared their insights on several topics, including which multinationals (other than their own) they most admired for their success in emerging markets.
People often use the term “emerging markets” as a catch all phrase implying that all countries within this category are broadly similar to one another. In reality, of course, the differences between India and China or Brazil and Russia dwarf their similarities. The heterogeneity of emerging markets raises questions for companies seeking to invest in these countries: How should we prioritize investments across emerging markets? How do we differentiate a more attractive market from a less attractive one? What criteria should we use in evaluating and comparing different markets?
Below I summarize some of the insights on how four different executives from four very different industries evaluate emerging markets.
- Nestlé. GDP growth is important for a food company, of course. In Africa, for instance, GDP has grown at about 5% per year over the past decade. Second, a country or region needs to meet a threshold level of infrastructure to allow the distribution of food which must be kept fresh. Rather than focusing on big bets, Paul explained that Nestlé maintains a “natural risk spread” by placing smaller bets in wide range of emerging markets. In Africa, for instance, the company builds lower tech factories, but constructs more of them and locates them closer to consumers. In aggregate, this spread your bets approach adds up to significant investments–Nestlé will invest one billion Swiss Francs in Africa in the next few years. Paul also underscored the importance of not pulling out of a country during periods of extreme volatility. Nestlé stayed in Peru during the Shining Path era, for example, and thereby established its long term commitment to the country.
- Vodafone. Given the large up-front investment in infrastructure required to compete in the telecommunications industry, Vittorio noted that firms like Vodafone cannot easily scale back their investment in a country unless they sell the entire operation. The first criteria determining an emerging market’s attractiveness is industry structure, which dictates profitability for competitors. Although Vittorio did not discuss it in panel, Vodafone has struggled to maintain profitability in India, in large part because the mobile sector has seventeen players (versus a few in many countries), and the resulting competition has depressed profitability for all players. Vodafone’s second criterion is demagraphics, specifically a young population that is socially mobile. Finally, Vittorio mentioned the regulatory and political environment. Although we did not discuss India explicitly, that country has attempted to impose a large tax on Vodafone and encouraged many players to compete away the profits required for investment in infrastructure.
- Deutsche Bank. Anshu agreed that GDP growth is important, but correlates very imperfectly with the attractiveness of a market for investment banks. In assessing countries, the first criterion is that the local government welcomes multinational investment banks. Given the high (and growing) level of regulation surrounding the banking industry, an invitation from the host government is critical. Second, once Deutsche has entered a market, it looks for barriers to entry. Third, in any emerging market, Deutsche seeks out segments where they can leverage their global strength locally-e.g., risk management, debt underwriting. The fourth criterion, according to Anshu, is access to local staff. Applying these hurdles, Anshu noted, leads Deutsche to a focus on some unexpected countries: China is critical, of course, and India Deutsche Bank’s most profitable market over past few years, but Turkey is also extremely important.
- Deloitte. Not surprisingly for a professional services firm, Deloitte’s primary criterion is entering markets that the firm’s clients are entering. Second, which domestic markets offer the most opportunities. Like Anshu, John mentioned access to sufficient local talent is a key criterion when considering an investment in a country.
Next up, reverse innovation.