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Break Through

Ambitious companies from emerging economies have stormed into global markets. They now face their biggest test ever.
Tim Burke, CFO Europe Magazine
February 4, 2008

Despite its striking red and silver pattern and a scroll-like shape that pays homage to China's invention of paper, the Beijing-bound Olympic torch that leaves Greece next month looks essentially like any other Olympic torch. But there's more to it than meets the eye. The torch, which will travel across 20 countries over five months, was designed by a 30-strong team of engineers from Lenovo, China's biggest PC maker. Though Lenovo wants its brand to be known for laptop computers, the torch and its journey are fitting symbols of the company's global aspirations. Starting out in Beijing in 1984 under the name Legend, the company has spent most of its life cracking China's nascent computer market. As recently as three years ago, its entire annual turnover — HK$22.5 billion (€1.9 billion) — was generated domestically.

That's not the case today. After its $1.75 billion (€1.2 billion) acquisition of IBM's PC business three years ago, it embarked on a new journey, one that catapulted it from the world's eighth largest PC player in terms of volume to number three, behind American heavyweights Hewlett-Packard and Dell. With turnover more than quadrupling since then, its business now reaches all corners of the world. Today China accounts for less than 40% of sales.

With expansion, Lenovo has joined the elite ranks of what Andy Miller, CFO for EMEA, calls the "new world" multinationals. This group of developing-economy companies has expanded far beyond their home countries and now competes head-on with mighty developed-world rivals. Many, like Lenovo, are bold dealmakers, bringing home-grown knowledge to bear on growth plans in developed markets. A case in point: India's Mittal Steel, which grabbed the headlines two years ago during its €18.6 billion takeover of Luxembourg-based rival Arcelor. More recently, Tata Motors and Mahindra & Mahindra, both of India, have battled to buy Jaguar and Land Rover in the UK from Ford, while Brazil's Vale, the world's largest iron-ore exporter, just announced plans to bid for Switzerland-based rival Xstrata.

Now, as fears of recession grip the developed world, many are looking to these developing-country high flyers to become key global growth engines. With their vast experience conquering some of the world's most difficult markets, The Boston Consulting Group (BCG) calls these companies the "new global challengers." The consultancy recently published research that identifies 100 globetrotting companies from developing economies that deliver profitability and shareholder returns far higher than many developed-country rivals. Having grown revenue by nearly 30% a year between 2004 and 2006, BCG reckons that the combined sales of these top-performing 100 companies will reach $11.8 trillion in 2015. "What is certain is that the new global challengers will only strengthen and multiply," the report notes. (See "Making the Grade" at the end of this article.)

Growth Engines
To make these projections a reality, says Janmejaya Sinha, a Mumbai-based senior partner and managing director at BCG, developing-economy "challengers" need to undergo far more aggressive change than they already have, reworking the business models that have served them well in the past, restructuring balance sheets to tap international sources of capital, and rethinking M&A to take them even farther afield.

Lenovo is well aware of the challenge. Worldwide expansion has been part of its plans for a long while. Back in 1999, then-CFO Mary Ma told CFO Asia, a sister magazine of CFO Europe, that Lenovo wanted to be a Fortune 500 company within the next decade. It still has a way to go, but buying IBM's PC business took it much closer than it ever could go on its own.

All this, however, is putting Lenovo's turnaround skills to the test. IBM's PC business lost nearly $1 billion in the four years before its acquisition, so that much of the integration process has revolved around getting it back in the black. According to CFO Miller, a key part of that effort has been introducing IBM to its homegrown "transactional business" model — that is, selling built-to-stock products for small businesses and consumers alongside IBM's built-to-order products for large corporate customers. The pilot took place last year in Germany, contributing to results that satisfy Miller. "In Germany, we grew revenue 67% and volume 86%," he says. "That's pretty spectacular growth for a PC business, and coming from our IBM heritage, that's certainly not the sort of growth we were used to seeing. That was a real lesson. You can see that these models do translate from one geography to another."

Another important part of Lenovo's plan involves the internationalisation of its senior ranks. While group CFO Wong Wai Ming, a former China-based investment banker, was brought in after Ma's retirement last year, Lenovo's CEO, Bill Amelio, is a recent recruit from Dell. The rest of the senior executive ranks are a mix of veterans from IBM, Lenovo and other PC companies "We have the eastern presence and western presence — two very different cultures — and I think we can use that to our competitive advantage," says Miller.


As for the CFO, he refers to himself as a "long-term IBM-er," having spent 22 years with the US firm, including a stint as finance chief of its EMEA PC business. Along with the turnaround, Miller's initial months at Lenovo's base camp in Paris were spent getting a new finance team up and running as quickly as possible, including accounting, tax, treasury and other parts of finance that work closely with, for example, global commodity managers on supply chain issues. Miller says it was a challenge he relished. "When we were in IBM, these were support functions that were outside of my scope and responsibility," he notes.

The turnaround is working. Lenovo achieved a profit of $161m in 2007 compared with $22m in the year following the IBM deal. But it can't rest easy. With its position as world number-three threatened by Taiwanese rival Acer, Lenovo wants to move on from the IBM acquisition and get back into deal-making. Just recently, though, Lenovo's young European team was dealt a blow when it lost out on a bid to buy Packard Bell of the Netherlands, which went to Acer and its newly acquired Gateway business. Miller concedes the deal "would have given us a step up," but reckons "we still have a solid consumer strategy with or without Packard Bell."

Aiming Higher
Of course, Lenovo always has its emerging-market roots to fall back on, and in a home market like China — where Forrester Research predicts the number of PC users will grow from 54m today to nearly 500m by 2015 — that's an enviable place to be. And Lenovo, like others, is leveraging its low-cost home base — "a fundamental element of their success," BCG notes — to compete against developed-country rivals.

But there is a downside. Competing on low costs alone is no longer viable. For one thing, as these companies move further into developed markets in order to build market share, they face the same cost issues as their more established competitors. For another, these competitors aren't sitting still, and are shifting supply chains around the world so that they, too, can take advantage of low-cost locales.

This is an issue that Satyam Computer Services, a $1.4 billion, Hyderabad, India-based company, is facing. Srinivas Vadlamani, CFO of Satyam since 1994, calls the company "one of the pioneers" in the low-cost offshoring sector, graciously adding, "We happened to be in the right place at the right time." The way he tells it, Satyam's big break came in 1992, when it sent a team of engineers to Illinois to pitch its services to John Deere, an American agricultural-machinery manufacturer. The team rented a flat opposite John Deere's IT centre and used a 64kbps satellite link to simulate offshore software development. John Deere became Satyam's first Fortune 500 customer. Today, it has more than 600 customers and nearly 50,000 employees in offices around the world.

Most of its customers are based in North America, but Vadlamani describes how around five years ago Satyam started to shift its geographic mix to increase Europe's importance. In 2004, Europe accounted for 14% of revenue and North America for 73%; in 2007, that mix was 18% and 64%, respectively. (India, for comparison, is included in the "rest of the world" category, which accounted for about 15% of total revenue.)

Meanwhile, Satyam and rivals such as Tata Consultancy Services, Wipro and Infosys — all based in India — want to increase the value of the contracts they win so they're no longer competing on cost alone. Moving into "front-end" consulting holds the key, says Anthony Miller, an analyst at Arete Research in London, noting that many Indian IT services companies are "desperate" to do so.

Satyam's first consultancy acquisition was in 2005, when it paid $23.2m (plus a $15.5m earnout) for Citisoft, an IT consultancy with offices in London, New York and Boston. A string of other acquisitions on both sides of the Atlantic has followed, giving Satyam a business mix to weather any turbulence that 2008 and 2009 might bring to western economies, assert equity analysts from Sanford C Bernstein in a report published in January. They reckon that Satyam will be the only top-five Indian IT services company to accelerate revenue growth between 2007 and 2008.

Vadlamani's plan now is to compete directly against developed-economy offshoring heavyweights such as Accenture. Shortly after unveiling quarterly results in late January — revenue was up nearly 50% to $563m, net income up 54% to $110m — Vadlamani was in Amsterdam with chairman and CEO Ramalinga Raju to announce that Satyam has become the first company to list American Depositary Receipts (ADRs) in both New York and Amsterdam. Listed in India since 1991 and in New York since 2001, the listing in Amsterdam "will make investing in Satyam easier, enable extended trading and enhance the organisation's visibility in Europe," the company stated in a press release.

Gorilla Warfare
In tapping more global investors, Vadlamani says his finance team — having grown from around 40 ten years ago to more than 300 today — has paid its dues. "A few years back we were new to US GAAP," says Vadlamani. "But now we can say with confidence that we can carry out US GAAP accounting as perfectly as any other global corporation." In addition, he says, "as a foreign private issuer [in the US], we learned to comply with SOX requirements well ahead of time [and] we have recently embarked on compliance with IFRS requirements." Whether many more developing-economy companies will want to follow in its footsteps remains to be seen.


Naspers, a 19.5 billion rand (€1.8 billion) South African media group, won't be. In May 2007, it delisted its ADRs from Nasdaq, opting instead for a listing in London. The reason? "Primarily because of the costs associated with Sarbanes-Oxley," says CFO Steve Pacak. "It's a very costly exercise and we don't think it's of much value to our shareholders." In addition to Naspers' listing in Johannesburg, it's hoped that the secondary listing in London will raise its European profile and financial clout. The company — which is involved in print, television and the internet — is "constantly looking at ways of raising capital and raising [it] in the most efficient way," Pacak says.

In any case, Naspers has tended to handle its global expansion differently from other developing-economy companies. It's been growing overseas since the early 1990s but, after an initial investment in Europe, it shifted focus to emerging markets such as Russia, Brazil and China. Why? Developed markets mean developed competitors, and "you're very careful of fighting a gorilla on his own turf," says Pacak, who joined the company in 1988 and became an executive director ten years later.

The group made its first foray outside South Africa in 1991 with a stake in FilmNet, a pay-TV company in Scandinavia and the Benelux region. From that base, Naspers grew its European business to cover Poland and Greece as well as taking a stake in Italy's Telepiu. But according to Pacak, the problem with operating in developed markets is one of scale.

During the five years following Naspers' European excursion, the pay-TV market on the Continent became increasingly cut-throat. In 1996, the company sold most of FilmNet to French pay-TV group Canal+, but kept its small Greek business, which it still believed had growth potential. Pacak reckons that if the company continued to focus on developed markets, "we probably would have been beaten up." Emerging markets, by contrast, are "virgin territories." Naspers has bought into a Thai pay-TV business and started to invest in China's burgeoning internet industry, acquiring a stake in Tencent, the owner of instant messenger program QQ. Other acquisitions include a minority stake in Russian email company mail.ru.

This focus on emerging markets has defined Naspers' international expansion strategy ever since. The group is putting its remaining Greek pay-TV business — now called NetMed — up for sale. It could be worth some 5.1 billion rand, says Abdul Davids, an analyst at South African investment bank Allan Gray. If a sale is successful, Naspers will reinvest the proceeds into another emerging-market target, Pacak says.

Naspers hasn't shied away from developed markets entirely. Its international head office is in the Netherlands — "a practical place to be" says Pacak — and it owns Irdeto, a Dutch encryption technology business that it recently bolstered with the acquisition of Cryptotec.

And there are other targets. Naspers' MIH subsidiary has invested in Nimbuzz, a Dutch company focused on wireless technology, and Pacak says the board is eyeing an acquisition in Germany's mobile TV market. Most recently, the company pushed into central and eastern Europe, acquiring Tradus of the UK, which operates internet auction websites in eastern Europe, and is awaiting the outcome of its bid to buy a stake in Polish instant messenger business Gadu Gadu.

"We don't have a view that we will never invest in Europe or the UK or the USA, or whatever developed market there is," he says. "It's just that we need to look at it very carefully, because in those markets, there are some seriously good and big media companies."

Your Turn
The experiences of companies such as Naspers sound a note of caution for other emerging-market companies, most of which are more eager to challenge their developed-country peers. Though they are increasingly formidable competitors and even potential acquirers, BCG's report notes that developed-market multinationals can also view the companies highlighted in its list as clients or strategic partners.

For his part, Lenovo's Miller discovered that being bought by a developing-economy company opened up new career opportunities to him and others. And according to Ian Coleman, head of emerging markets at accountancy PricewaterhouseCoopers, it is "possible that one of the quickest ways to enter an emerging market is to sell a stake of your business to an emerging-market player."

Now, BCG's global challengers face a host of uncertainties. Many of their developed-economy expansion plans will be tested by an economic slowdown, or outright recession, for the first time. With what impact? For offshoring companies such as Satyam, "the short answer for the moment is nothing visible as yet," according to Miller at Arete Research, who says that recent results from India's IT services companies seem to show little impact from problems in the US. "The sense that I have is that IT budgets will come down in 2008," he adds. "But the offshore players like Satyam will be less impacted because if the aim of the CIO and the CFO is to cut IT costs, then they will increasingly look at putting more work offshore."

BCG's Sinha agrees that problems in the credit market and worries about global economies should do little to curtail the ambitions of the new global challengers. "Depending on which time horizon you look at, there is going to be a shift east in terms of the growth momentum," he says. Discussing his home market of India, he adds that the ongoing credit crunch could even open up new prospects for domestic companies on the global stage. "The growth momentum here will show [companies'] valuations being much fuller than what is currently possible in places where you see an overhang of something like a subprime crisis," he says. "So I think it will be a time of opportunity for them that they should be looking at very carefully."


Tim Burke is senior staff writer at CFO Europe.


Making the Grade

It takes a lot to get on Boston Consulting Group's list of global challengers. In deciding the 100 companies, BCG drew up a list of more than 3,000 candidates based in 14 emerging markets. To make the final cut, companies needed an annual turnover of at least $1 billion and to score highly on BCG's "globalisation credentials" checklist.

Those credentials covered five areas: international presence, judged by the location of subsidiaries, manufacturing facilities, sales networks and R&D centres; international investments during the past five years, such as acquisitions; access to capital for financing global growth; breadth and depth of intellectual property and technologies; and the international appeal of its products or services.

Once whittled down, the bulk of the 100 companies (41) hail from China. Most of the 41 Chinese challengers are public and/or state-owned companies, including oil and gas group PetroChina, engineer Sinomach and China Shipping Group. Next is India, home to 20 of BCG's challengers. All of the Indian companies highlighted are public and none is state-owned. Notable names include several arms of Tata Group — its IT, automotive, steel and tea divisions — as well as pharma companies such as Ranbaxy and Dr Reddy's Laboratories. In third place is Brazil, with 13 companies on the list, ranging from meat processor Perdigão to oil group Petrobras.







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