COMPASS MAGAZINE #11
COMPASS MAGAZINE #11

POST-BRIC WORLD Experts comb the globe to predict the next emerging markets

After a spectacular ten-year run, economic growth in the BRIC countries (Brazil, Russia, India and China) is slowing, and multinationals are eager to anticipate where the next investment opportunities will arise. Different financial analysts have attempted to create the next basket of countries – but as quickly as those lists are created, governments fall and fresh uncertainties occur.

In the post-World War II era, industrial nations used the label “Third World” to describe poor, underdeveloped countries. In 1981 an enterprising Dutchman, Antoine van Agtmael, coined the phrase “emerging markets” for the most promising of these nations, triggering a wave of investment. In 2001, Goldman Sachs coined the term BRICs – Brazil, Russia, India and China.

The BRICs enjoyed a spectacular run, exceeding growth rates among the world’s richer nations and attracting massive flows of direct investment. Some experts even predicted – overoptimistically, as it turns out – that the BRICs would soon outstrip the combined economies of North America, Europe and Japan.

Today the headlines are buzzing again due to signs of economic, financial or political difficulty in all four BRICs. Brazil’s underclass has rebelled against entrenched political leadership and growth has slowed; Russia has returned to an authoritarian model based on raw-material exploitation; India has failed to deliver reforms needed to stave off a financial crisis; and China’s export machine is slowing while the country’s growth rate has plunged from double digits to a more modest but still impressive 7.5%.

And so the hunt is on among corporate leaders, economists and other assorted soothsayers for a credible prediction of the post-BRIC world order.

“I THINK CHEAP LABOR HAS SHOWN ITSELF TO HAVE RISKS THAT NO ONE EXPECTED.”

MICHAEL MORAN VICE PRESIDENT OF POLITICAL RISK, CONTROL RISKS

MIST AND CIVETS

Two of the most talked-about lists of promising economies – MIST (Mexico, Indonesia, South Korea and Turkey) and CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) – both include countries that don’t quite fit the “emerging” profile. South Korea, for example, is already an advanced industrial and technological nation; witness the success of Samsung Electronics, LG home appliances and Hyundai Motors. Vietnam seems unable to break out of its centralized Communist system. Egypt is in political and social chaos, and South Africa faces political gridlock and mounting labor woes.

Although there is no clear consensus on which nations should appear on the post-BRIC list, one emerging principle is that cheap labor, which made the BRICs into economic powerhouses, isn’t as attractive as it once appeared.

“I think cheap labor has shown itself to have risks that no one expected,” said Michael Moran, vice president of political risk for Control Risks, a London-based consultancy. “Anyone, from Apple in China to the garment industry in Bangladesh, has found that it looks great on paper, but the reality is that the lack of regulation has enormous downsides.” Hidden risks include corruption, shoddy safety standards, health and human rights abuses, and environmental degradation. “The further away you are from your source of manufacturing, the more you are putting your name at risk,” Moran said.

“MARKETS ARE BEGINNING TO INTUITIVELY GRASP THAT THE UNITED STATES AND NORTHERN EUROPE ARE REGAINING THEIR COMPETITIVENESS.”

ANTOINE VAN AGTMAEL SENIOR ADVISOR, GARTEN ROTHKOPF

Tarun Khanna, director of the South Asia Institute at Harvard University, agrees that companies are growing weary of investing in countries that do not govern themselves well. “Whether we are consuming labor or consuming milk, the stuff we use comes to us through a chain of people who touch it, and each one of them has the capacity to mess with it,” said Khanna, co-author of the 2010 book Winning in Emerging Markets: A Roadmap For Strategy and Execution. “We are vulnerable to shortchanging, lying, false disclosures and criminal activity unless there is a mechanism to deal with those things.”

AREAS OF EXPERTISE

Khanna argues that Western multinationals are stepping up their efforts to identify and invest in countries with specialized expertise and those generating promising ideas that could go global, a second emerging principal of the post-BRIC era.

India, Khanna said, is innovating to perform heart surgeries at minimal cost; South Korea is a hotbed for broadband communications; Brazil is ahead of the rest of the world in developing biofuels; Colombia is experimenting with three technological incubators to encourage the rise of digital entrepreneurs; and Kenya is a world leader in mobilepayment systems.

“IF YOU ARE IN FINANCIAL SERVICES OR MOBILE PHONES, YOU’D BE CRAZY NOT TO HAVE SOMETHING GOING ON IN KENYA.”

TARUN KHANNA DIRECTOR OF SOUTH ASIA INSTITUTE, HARVARD UNIVERSITY

Surprisingly, Kenya does not appear on any leading list of post-BRIC nations, and its challenges with terrorism in Somalia, among other issues, may mean it never does. But Kenya’s experience with mobile payments reveals how a nation in an economically challenged region can generate ideas that command international attention.

Kenya has been largely an unbanked society – until a mobile phone company recognized the opportunity. “To get a credit card, you had to be a member of the elite with assets kept offshore and friends at the bank,” Moran said. Now, thanks to the country’s M-Pesa system, anyone with a mobile phone can pay bills and transfer money. “The phone company realized that they could do to the banks what Apple did to the music industry,” he said. “It stepped in between the banks and the customer. It became the conduit for credit.”

The M-Pesa system (M for mobile and Pesa, the Swahili word for money) is recognized as the world’s most advanced mobile payment system. “If you are in financial services or mobile phones, you’d be crazy not to have something going on in Kenya,” Khanna said.

At least two dark horses in East Asia also merit mention: Malaysia, which is booming thanks to relative political stability, strong language capabilities (Malay, English and Chinese), and the emergence of internationally successful companies; and the Philippines, with its English-language capabilities and skilled workforce accessible via speedy communications. Many back-office and call-center functions formerly located in India have shifted to the Philippines because Filipinos have a better command of American idioms and cultural cues.

LATIN AMERICA ON THE RISE

Aside from Brazil, Latin America has largely been left out of the rush to prosperity; two perennial contenders are bidding to break out of the pack. Colombia’s President Juan Manuel Santos has made strides against drug cartels and insurgencies, attracting record levels of foreign investment. Dozens of start-up companies have sprung up from the country’s incubators. China is tapping Colombia’s raw materials, and growth rates have stabilized at about 5% annually. A middle class is emerging.

Mexico has new leadership in President Enrique Peña Nieto and is undertaking sweeping reforms to open up its PEMEX oil monopoly, limit the powers of its quasi-monopolistic telephone company, reform the country’s educational system and get a grip on drug-related violence. Strong investment flows from US manufacturers are continuing. “Mexico has a real shot at it,” Moran said.

Wherever they choose to invest next, Western manufacturers are embracing a third principle: making more sophisticated location decisions than many have in the past. Rather than setting up factories to serve a single emerging market or to source goods for the American market, they will seek to create integrated regional hubs that are more cost-effective, predicts John Biagioni, general manager of Viatran in Wheatfield, New York (USA), which sells pressure- and liquid-level transmitters used in the automotive, aerospace and oil and gas industries.

Biagioni has emerged as a strong manufacturing voice for the idea that companies should consider the total cost of ownership (TCO) of their plants. In the past, decisions were often based on piece-part labor rates without consideration for high staff turnover rates, training costs and wage hikes, escalating shipping fees and overall coordination costs. Biagioni urges manufacturers to ask themselves: “Are you chasing something, or are you setting up a strategy for being a worldwide manufacturer forever? I think more and more smart people will realize that products should be designed fora region, made in the region and serviced in the region.”

THE WEST REBOUNDS

Some of the most surprising post-BRIC winners may be the United States, Canada, Australia, Germany and the United Kingdom. “People overestimated the competitiveness of China and the other (BRIC) countries and underestimated America’s own competitiveness,” says van Agtmael, who is now a senior advisor at Garten Rothkopf in Washington, D.C. (USA), an advisory firm for multinational companies. “What we’re seeing today, and what markets are beginning to intuitively grasp, is that the United States and Northern Europe are regaining some of their competitiveness.”

The latest Foreign Direct Investment Confidence Index from the A.T. Kearney consultancy supports van Agtmael’s observation. It shows that the United States moved up from fourth position in 2012, edging past China in 2013 to become the Number One destination for future investment by leaders of the world’s largest companies for the first time since 2001. Canada (ranked 20 in 2012) and Mexico (previously unranked) both moved into the Top Ten. Other big climbers include France, Japan, Spain, Switzerland and Poland. Argentina and Chile, which did not appear on the list in 2010 or 2012, entered the survey at 22 and 23, respectively. Countries experiencing significant drops in their rankings, although they still make the Top 25, include Indonesia (ranked 9 in 2012 and 24 in 2013) and Malaysia (ranked 10 in 2012 and 25 in 2013).

Why the shift? Manufacturing and labor costs have exploded in China, along with transportation costs to the rest of the world. The high-profile fires in Bangladesh’s garment industry have wounded retailers ranging from US-based Wal-Martto Sweden’s H&M. In technological terms, Western companies increasingly recognize that shortening the “feedback loops” between their innovation and manufacting efforts helps to create more innovation faster.

All of which means that some of the next hot markets might be the old hot markets – the established population centers of North America, Europe and East Asia.

by William J. Holstein Back to top