On Edge

It was a matter of when, not if, as far as Wolfgang Rigler was concerned. Months ago, the veteran finance executive for Mars in central and eastern Europe (CEE) could see there was trouble ahead. "We always knew there was a certain risk in the region," says Rigler, Mars's Vienna-based corporate staff officer of services and finance. And although the $30 billion (€22.6 billion) US-based pet-care and snack-food company, like many western multinationals, recently began making "significant improvements" to its profitability in the emerging markets on Europe's eastern edge, Rigler says, "we did nevertheless warn corporate a few years ago about upcoming problems." The post-communist boom was indeed overheating; the heady days of fast-paced growth were in peril.

But what Rigler — and almost everyone else — did not foresee was the speed and severity of the meltdown. Notably, the dramatic devaluations of major CEE currencies such as the Polish zloty caught him by surprise. "I remember having talks with finance a year ago that we should expect a 10%, maximum 15%, devaluation [of the zloty against the euro]," he recalls. Instead, it lost a lot more against both the euro and the dollar at various times since the autumn, while the Russian rouble, Hungarian forint and many of the region's other currencies suffered similarly, without recovering much ground since. (See "Off the Cliff" at the end of the article.)

Any hopes among corporate executives that the region could escape major damage from the global downturn have long been dashed. In fact, it looks as if many CEE economies will bear the brunt of it. Last month, the International Monetary Fund cut its growth forecasts for the CEE countries as a whole, predicting a 3.7% decline in 2009, compared with a 2.9% increase in 2008. It also warned of a wave of corporate defaults in emerging Europe this year — after all, there is some $700 billion in debt that needs to be rolled over, nearly all of it from corporates and banks. (See "Reaching Out" at the end of the article.) Add in the CIS countries, and the IMF's predictions get even grimmer: growth in those countries will contract 5.1%, after growing 5.5% the previous year.

It's a dramatic change of fortune for investors in the region, not least the foreign multinationals that have relied on these burgeoning emerging markets for growth in recent years. "Up until September, we were in a kind of comfort zone," says Alois Höger, the Vienna-based CFO for CEE at Henkel, a €14 billion German homecare, cosmetics and adhesives company. Henkel, for its part, has built a formidable presence in the region, with more than 10,000 staff in 32 locations and 33 production units. Turnover in the region is now nearly €3 billion, Henkel's third-largest region after western Europe and North America.

Not so long ago, the subsidiaries of many western multinationals "enjoyed the good life," recalls another CEE finance chief of a big American manufacturer. "We were given a lot of leeway to do what we had to do." What they had to do was deliver revenue growth, year after year, often in double digits. Now that this is nearly impossible, finance chiefs of CEE subsidiaries face a more delicate task when reporting to bosses back at headquarters.

"The group CFO now wants to know, 'Guys, what is happening in your country? From the outside, it's very unclear,'" says Miklos Dietz, a Budapest-based partner at McKinsey & Company. "Those CFOs who were a little bit under the radar screen have an increased presence at any western group now."

R-E-S-P-E-C-T
That's good news for CEE CFOs who "know how to turn it to their advantage," says Dietz. Even so, with increased visibility comes increased accountability, leading to potential tensions between headquarters and divisions.

Indeed, a growing frustration among some local CFOs is that they feel that their "voice isn't being heard" and that the chance to make on-the-ground decisions is slipping away, with headquarters centralising more decisions as a result of the downturn. More often than not, the key to keeping the confidence of headquarters comes down to one thing: communication. In particular, the timeliness, clarity and accuracy of reports, not only to headquarters, but also to teams on the ground.

Some CFOs find this easier than others. At Henkel, Höger says that the number one mission of his regional finance crew has long been to provide "quick and reliable" information. After all, "the faster you get reliable data, the better the decisions." Nonetheless, he notes, "in times like this, it's even more critical that finance is faster, and only if we provide numbers quickly and reliably will we [win the respect] of the business."

The key to the fast flow of information within finance at Henkel CEE is standardisation. Uniting finance staff on the ground and at regional headquarters is a principle of "one country, one administration, one legal entity." What's more, 16 CEE countries are all working from the same ERP platform.

But it's not just the flow of numbers to group headquarters in Dusseldorf that Höger believes will guide this part of Henkel through the downturn. He's also mindful of the narrative that accompanies the numbers, especially since the sharp currency depreciations. "Countries are doing much better in local currencies," he points out. "And that's something you have to sell to headquarters and locally, to keep the mindset positive that their countries are still doing well." For this reason, he advocates publishing currency-adjusted reports for the region alongside the requisite consolidated accounts.

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