Global Trade: The growth strategies?

Every company is playing to its strength or weakness in developing growth strategies in emerging markets. There are a few important strategies that are being played out daily.

Acquisition strategy:  As GDP and population grows coupled with a better quality of life,  the demand and trade for energy, commodities and technology have been increasing partly to achieve energy, food and technology security.  Acquisition strategies have spurred demand of energy and resources from Indonesia, Australia, South Africa, Brazil and Middle East; investment activities have also increased in these countries. Cross border trades between Iran-India, China-Russia-Mongolia has also increased. The resource acquisition strategy has increase trade and investments for crude oil from Africa and Canada, mining into Indonesia, Mauritania, South Africa and Australia, fertilizers from Middle East and North Africa, organic chemical processing in agricultural rich belts of India, China, Brazil.

Acquisition of technology and technology transfer led investments in the information and communication technology (ICT) and hardware is evident in emerging markets. Indian, African and Emerging markets are increasing relying on Chinese, Korean, Taiwanese technology in Information and communication technology and hardware. 

Go to market:  Emerging market companies tend to aggressively pursue go to market strategies to optimize value specialization, achieve economies of scale, and take advantage of regionalization and globalization of supply chain that is coupled with falling trade barriers and reduction in cost of transportation and packing costs. Other factors that also tend to increase market penetrations relate to optimizing capacity utilization, sale of surplus goods and services and capture of arbitrages in emerging markets. 

Emerging market companies are increasingly employing variable cost recovery models to capture newer markets.  The cost efficiency and scalability models are increasingly evident in the exports of automobiles, spare parts, cell phones, computers, garments and high tech-equipments.  Go to markets has also been very successfully for companies in food and agriculture sector that have been serving the taste and preferences of the emerging markets diasporas viz. Indians and Philippines in ME, Chinese in SEA/Africa, ME.  Companies with lower investment growth in high value added products or those unable to go to market are increasing trade in intermediate and semi processed goods.

Food, oil and technology security:  Food, oil and technology security has increasingly caused companies to invest and trade with other markets. New trends emerge relative to contract farming in Africa and India, investments in joint ventures and alliance for oil exploration, diversification of source of food – India sources pulses from Canada, Australia, Myanmar, and Africa. 

Reputed corporations promote trust based free trade policies that increase overall food security and support agriculture development through trust based open trade, efficient local markets.  They also work to expand access to food, improve nutrition and pursue partnerships to end hunger.

Marketing of services and infrastructure usage: Trading hubs have formed around shipping and financial services, bundling of multiple services – trade, banking, investments, marketing, etc. Singapore, Dubai, HK offering lower corporate taxes, global status with benefits. For example, Singapore has an extensive network of double tax agreements (DTA) with more than 70 countries across the globe, an attractive tax regime, talent pool of skilled professionals, world class infrastructure to live, work and transact business. Legal systems are efficient and transparent which also provide good IP protection.

Follow the money and build deep pockets: Emerging markets export credit agencies and banks are increasingly assuming risks via financing of exports whilst in past a feature that was concentrated with western banks. Increasingly Chinese banks and ECA’s have been providing financing to Indian steel mills, ICT companies and power plants.

International banks with vast international network and historical ties and emerging market banks where their Diasporas (e.g. Indian banks in Africa and Middle East) are located are helping trade and supply chain financing, managing counterparty and financial risks.  These institutions provide valuable information on legal framework, import export regulations, credit and financial risks helping manage risks and open up opaque markets.

As emerging market countries mop up foreign exchange reserves; government linked companies and sovereign funds are increasing their investment exposures in other emerging markets especially acquisition, technology transfers, and contract farming.   Sovereign Wealth Fund (SW) and Government Linked Companies (GLC)’s from Singapore, Russia, China, Malaysia, India, Qatar and Dubai are particularly active.

Developed market companies are learning from EM and also changing business models: Developed market companies are increasingly going local to adapt to local demand, predominantly hiring local talent, and are also creating local structures with little interference from head office.  McDonald’s and Pizza hut are increasingly providing foods to local preferences, an all vegetarian Subway, Microsoft delivering local language capability, etc.. Some of the highly successful MNC’s in India like Hindustan Unilever, P&G, Cadburys, Cargill and Philips have historically adapted to local business demands and have been exporting products or technology to other emerging markets from India.

Political support to trade: Political support for trade is gaining support as trade; growth and development are directly co-related. Political institutions recognize that trade is creating jobs, economic growth, raises standard of living and nutrition levels; an highly engaged and employed population promotes social and political stability. Political will is also creating and empowering billions of new consumers in EM.

Political support as helped reduce both natural and manmade barriers;  natural barriers are falling with education, ICT, cultural exchange and travels and  manmade barriers are falling as stakes in growth increases and regional partnerships emerge. The increase in interdependency among countries is also promoting harmony and peace.

Government participation has also helped build bilateral regional partnership, co-operation agreements and Free trade agreements (FTA) though multilateralism is limping and that regional partnership agreements have ended up creating a ‘noodle bowl’ of FTA’s. 

Countries with multiple FTA’s like Singapore is also becoming bespoke hubs for trading and value addition. Infrastructure, transport and shipping, insurance, information communication technologies (ICT), banking and financial services have become powerful catalyst of trade for these hubs.

This isn’t business as usual, the world isn’t flat!   

Emerging markets are complex and fraught with a high degree of implementation risks as socio-economic, cultural and legal frameworks are different needing different approach and spread of corporate resources. Further, markets are opaque, corrupt and may lack financial depth. Volatility in foreign exchange and price of commodities can have material impact on the company’s investments and exposures in the emerging markets.

Trade also creates interdependence which carries higher risk of contagion and foreign shocks.  Intense competition is increased redundancies and inefficient use of resources. Competition for resources also creates inflation, shortages and geo-political tensions. 

Urbanization is also bringing changes that governments are unable to cope. Unplanned growth in many emerging markets is also creating pressure on the environment, usage of water, air quality and quality of human relationship and family lives.

Government intervention and policy changes can impact investments and trade as political institutions feel unsecure with volatility on their currency and foreign exchange reserves. Social and economic challenges intensify as a result of pressure on infrastructure, inflation, disparities in income and wealth.

Increased empowerment of people and challenges to socio-economic conditions of the local population makes policy making unpredictable. 

In order for companies to succeed and sustain, companies have to accept that one size does not fit all, talent is hard to find, relationships with government are unpredictable, competition is intense from both local companies and developed market companies.