Home' Trinidad and Tobago Guardian : March 13th 2014 Contents MARCH 2014 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
THE ECONOMIST | BG25
In 2007 Unicredit, an Italian bank,
fought off ferocious competition from
other Western lenders to buy
Ukraine s fourth-largest bank from
an oligarch for a queasiness-inducing
US$2 billion. This week, amid talk of war
and default, Unicredit limited withdrawals
from its ATMs in Ukraine. At the same time
the shares of firms that are big in Russia,
such as Carlsberg and Renault, fell.
The turmoil in Ukraine is one of a host
of troubles that Western firms are facing
in emerging markets. Slowing growth, falling
currencies, weak commodity prices, bad
investment decisions and that catchall of
a thousand corporate woes, political risk,
have combined to disappoint managers
Investors have noticed. Rich-world firms
with above-average exposure to emerging
economies have lagged America s stock
market by about 40 per cent during the
past three years.
All this is leading firms to re-examine
their emerging-market strategies. For many,
although the experience has been tough,
the prospects are good. However, some have
wasted enough shareholders money and
should head home.
The corporate world is as susceptible to
fashion as Paris or Milan. In the late 1990s
the e-commerce bubble seduced all but the
most sensible firms. In the mid-2000s, the
private-equity industry declared that the
listed company was dead. Far more powerful
than either of those trends, though, has
been the belief that Western firms should
pile into emerging markets.
The boom dates from the 1990s, when
the Berlin Wall had fallen, India had opened
up and China had begun to prosper. Firms
invested in emerging markets first to man-
ufacture goods for sale in rich countries,
then to sell their products to increasingly
affluent new middle-class consumers. The
financial crash and subsequent recession
Emerging markets, submerging hopes
in the West only sharpened their enthusiasm for
The volume of takeovers by rich-world firms in
developing countries more than quadrupled between
2003 and 2010, to US$180 billion. Rich-world firms
have invested some US$3 trillion in emerging
economies, making it one of the biggest corporate-
investment cycles since the railway boom of the 19th
century. Parisian cognac distillers, Japanese male-
cosmetics firms and cranemakers in Illinois all have
These investments have transformed the structure
of many firms. In 1999 Unilever said that the rich
world was its "backbone," but now most of its sham-
poos, soaps and soups are sold in developing countries.
Boeing sells more airplanes in China and Latin Amer-
ica than it does in Europe. Salesmen for Germany s
Mittelstand are wining and dining clients in Chengdu
as well as Cologne. Research operations have been
rejiggered to create more products for poor people.
Executives with emerging-market experience have
shot up through the ranks.
The developing world promised spectacular riches.
On average, however, the return on capital that
multin.ational firms are making in emerging markets
has been mediocre, no higher than the global average.
Many firms are not getting adequate reward for the
risks they are taking. Some have lost a ton of money.
So what went wrong?
In their enthusiasm to get into emerging markets,
plenty of companies did not take the risks involved
seriously enough. Russia s move into Crimea may
have been a shock, but -- after a similar move into
Georgia in 2008 -- it should hardly have been a sur-
prise. Governments tend to play rougher in emerging
markets. The Spanish oil firm Repsol had its assets
in Argentina expropriated in 2012, though on February
26 it agreed to a compensation package. India s tax
officials have tried to kneecap IBM, Nokia and Voda-
fone, among others.
Mostly, though, bad management was to blame.
Too many firms overpaid for acquisitions. The average
valuation in 2007 was double that in 2002-2003.
Others plunged into markets that were saturated. In
Brazil carmakers have at least 20 per cent excess
capacity and vehicle sales fell last year. At least 20
of the world s insurers are squabbling over the tiny
slice of India s insurance market that is not state-
controlled. Some industries, such as pharmaceuticals,
found that their old business models did not work
in poorer places and failed to invent new ones.
Chief executives tend to believe that they would
be mad to cut their emerging-market exposure. After
all, the firms that quit Asia after its crisis of 1997-
1998 made a big mistake.
Foreign firms face far more formidable local com-
petitors than they did then, however, and struggling
multinationals should not assume that, when eco-
nomic growth recovers, it will be as fast or as wide-
spread as in the past. A decade of low interest rates
and rampant Chinese demand allowed almost all
developing countries to grow at turbocharged rates,
even those that were badly run. Now the global envi-
ronment is less forgiving.
@2014 The Economist Newspaper Ltd. Distributed by the
New York Times Syndicate
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