How should British businesses approach emerging markets? A glance at the UK’s leading trading partners, and how exports to each have grown in recent years, answers that question – up to a point.
Exports by UK companies to China have grown at an annual rate of nearly 18 per cent since 2004, while those to India and Russia have risen 12 and 16 per cent a year respectively.
Yet these three nations, which have been among the fastest-growing economies in the world over the past decade, are still much less significant export destinations than the UK’s traditional trading partners, the US and western Europe.
|Rank||2011 (£bn)||Average annual growth rate|
|Source: HMRC, Overseas Trade Statistics|
And Brazil – the “B” that, together with the other three fast growers, comprises what are known as the Bric nations – does not even figure in the UK’s top 20 markets for exports.
For many companies, to really take advantage of the opportunities offered by the emerging world the only option is to go there and set up shop.
Genus, a UK biotechnology company that applies genetics to animal breeding for pork, beef and dairy producers, has been in Brazil for more than a decade and in Russia, China and India for eight, five and three years, respectively.
Karim Bitar, chief executive, says the appeal of emerging markets is not just that their economies are growing, but the ways in which they are changing.
Rapid urbanisation is one factor. In China until recently, about 20 per cent of the population lived in cities. Today, the proportion is about 50 per cent and is expected to rise to 70 per cent by 2050. At the same time, farming in the country – which already accounts for half the world’s production and consumption of pork – is undergoing rapid “technification”.
Three years ago in China, a quarter of pig production was in large-scale farms and three-quarters in back-yard operations, Mr Bitar says. “Now, we think 35 per cent is in large farms and in 2015, just three years from now, experts say 50 per cent will be.”
For Genus, being a part of that process is hugely attractive. But it has meant navigating an entirely new business and cultural landscape.
“In China, the first challenge is defining who is your customer,” Mr Bitar says. “It is not only the producer but the government, at a national, provincial and local level. You need to know who heads the provincial agricultural secretariat, who is in charge of livestock production and about the regulatory and land permits. We all know China is a big market where you can make a lot of money – the secret is how.”
In the case of Genus, that means getting to know the important local players and offering them solutions and ideas. For China’s leaders, ensuring sustainable, secure and reliable food supplies is a top political and social priority.
“If they feel you can help them with their social development plan, their feeling is, ‘OK, here is a company that is trying to help me, so I am OK with them making money.’ The ultimate goal is to become the equivalent of a local player,” Mr Bitar says.
Genus, which made pre-tax profits of £46.5m in the year to June on revenues of £342m, makes about 30 per cent of its profits in Latin America and Asia. It expects that figure to be 40 per cent five years from now.
Another early entrant to emerging markets is Michael Page International, a UK recruitment consultancy. Steve Ingham, chief executive, says the company went to Latin America 13 years ago “with no competition”.
“We have gone from 200 people in Latin America and Asia to more than 1,200 since 2006,” he says. “We have opened 30 offices, seven in Latin America and 15 in Asia. It has been an absolute no-brainer.”
Less straightforward was the initial adjustment to local business culture.
“In China we have a lot more rungs on the same ladder,” Mr Ingham says. “Managing Chinese people is different. As a culture, they like to see success in a measured way. That means more frequent promotion, and when you do promote somebody you bring in a photographer and give them a certificate. Everybody knows the increase in salary they will receive if they are promoted and what they need to do to get it.”
In Brazil, the challenges are different. “São Paulo is a dangerous city,” he says. “The guy who runs our São Paulo operation was gun-jacked this year.”
He survived the experience. But for companies still making their minds up about emerging markets, it is the unknown more than any specific threat that weighs most heavily.
“Many companies have a fear factor,” says Mr Ingham of his recruitment clients. “They don’t have a lot of knowledge. But if you want to spread your risks and opportunities, you have to look at the economies that have a better outlook. If you have the wherewithal and the courage, you will go there.”
First, though, they must overcome that lack of knowledge. Daniel Wagner, chief executive of Country Risk Solutions, a risk consultancy, says: “We work with large corporations that you would think would be sophisticated but, ultimately, they are not.
“Even the large conglomerates seem to have a one-dimensional view of the world when they invest overseas.
“There is one in particular that has such a lack of sophistication, it decided whether to invest in Saudi Arabia based on … the film The Kingdom [about the bombings of foreign workers in the country].
“This is a top 20 multinational. If these kind of companies can be so off the rails, what are the chances for the other 90 per cent?”
What derails many companies, Mr Wagner says, is not so much problems dealing with regulatory or legal risk, as companies have lawyers and other consultants to guide them through those challenges. Nor is it because they are trying to go it alone, as most companies nowadays understand the need to operate, at least at first, with local partners.
The problem, he says, is often a failure to do basic due diligence when selecting those partners.
Mr Wagner says the mindset of companies is: “We don’t necessarily know what we’re doing, but we have this guy we know who can lead us to the promised land and everything will be fine.”
The reality, of course, is more complex. To companies, unlike Genus or Michael Page, that no longer have first-mover advantage, the challenges may seem especially daunting.
But with the UK domestic market subdued and opportunities increasing in emerging markets, a good way to start is by learning from others.