Local Knowledge

The shining glass building that houses the offices of ICI India would blend in perfectly in a U.S. suburban office park. But it's located in Gurgaon, India, a so-called special economic zone more than an hour's drive from Delhi. Inside an air-conditioned office, while sidewalk vendors carry on a lively trade in the midday heat, Sandeep Batra is explaining the peculiarities of the Indian paint business.

"We don't sell our paints through big retailers as you would in Europe or the U.S.," says Batra, the urbane CFO of Imperial Chemical Industries's Indian operations (British ICI is a subsidiary of Dutch chemical company Akzo Nobel). "We sell through mom-and-pop shops in the markets."

To do so, ICI must persuade store owners to make a costly investment: a tinting machine that enables them to mix the full range of ICI's paint colors. And because the company sells through hundreds of tiny shops instead of big home-improvement centers, ICI needs 60 warehouses in India instead of the 1 or 2 typical in most countries, as well as a sales staff many times bigger than the norm.

Such deviations from ICI's usual way of doing things cost money, but Batra and his colleagues in Gurgaon have learned how to overcome objections. "Our business situation is impossible to explain to someone who has never visited India," he says. "So when the CEO or any other senior visitors come, the first thing we do is take them to the market. We take them to the shops and to the warehouses where we sell materials. That's a very different India from what you see in this office. Once we do that, we never have any difficulty explaining about the need to put these tinting machines in, or the need to have feet on the ground, or whatever else is required to chase the opportunities we have here."

It's always been helpful for a regional CFO in Asia (or elsewhere, for that matter) to build this kind of understanding with headquarters. Now, it's becoming essential. The reason: as growth slows in the United States and other developed markets, CEOs are pressuring Asian operations to grow faster. If those applying the pressure don't understand the ground-level constraints of Asian markets, they may well impose unsuitable strategies and push for unrealistic results.

Indeed, many finance executives of Asian subsidiaries say they are being squeezed between demands from headquarters and the limitations of local markets. The China CFO of one American industrial company reports that because of poor business conditions in the United States, top management is asking him to raise his forecast by 10 percent. But his division is already growing at a 30 percent annual clip, and he has trouble getting his superiors to understand why even faster growth is difficult, if not impossible.

"I've worked in the U.S. office," says the CFO. "When it comes to China, they have no comparisons and no good analysis. They have too many countries to take care of. All they can do is give you targets and track your performance."

Rebecca Norton, vice president of finance, Asia Pacific, for software maker Business Objects (a unit of Germany's SAP), also feels the push for even higher results. "I get a little nervous that the pressure and expectations [from the home office] are not necessarily in line with actual market conditions out here."

A Structural Problem?
In part, such misunderstandings can be traced back to corporate structure. During the 1980s and '90s, the balance in multinational companies tilted toward greater global integration, with an eye toward seizing opportunities across business lines and saving money by doing things in a common way everywhere. One result was the global business unit, an arrangement that in many companies has replaced country-level units. This structure has often led companies to unintentionally shortchange their emerging-markets operations, says David Michael, managing director of Boston Consulting Group's Greater China practice.

"It gives you a global view on one hand, but when incentives aren't right, the high-growth markets fall off the radar screen," he says. The reason is that business-unit managers may be focusing on short-term global-performance indicators, and trying to hit their quarterly, one-year, or two-year targets. If most of the profit is coming from developed markets, it's tempting to allocate scarce resources to those operations first and neglect emerging markets that boast more potential than actual profit.

Exacerbating this head-office bias is the common practice of putting expatriates in charge of local operations and then shifting them out after just a few years. While there are good reasons for relying on expat managers, the arrangement can encourage short-term thinking. "We have a lot of expats come to China, and since their service period is just three years, they just want to make sure they do a good job for those three years and then return to receive a promotion in the U.S.," complains the local China CFO. "But I want sustainable growth here, and that means a longer-term focus on people and investment."

Satish Shankar, a partner with Bain in Singapore, argues that if multinationals are to earn significant profits from their emerging-markets operations, they must stop relegating emerging markets to second-tier status. "Most [multinationals] operating in Asia have built decent positions, but don't have the same market visibility and sustainability as they have in their home markets," he says.

• 1
• 2
• 3
• next »