cfo.com

Print this article | Return to Article | Return to CFO.com

Looking for Growth in All the Same Places

With so many economies pinning their growth prospects to emerging markets, the race for resources – human and otherwise – is certain to intensify.
Celina Rogers and Josh Hyatt, CFO Magazine
September 1, 2012

If you described the current condition of the global economy as a traffic report, it would go something like this: businesses are bumper-to-bumper heading in the direction of the world's emerging economies — and there's surely gridlock ahead.

That's because CFOs around the world are planning to invest in efforts to reach consumers in emerging markets. The strategy is part of their postdownturn focus on "value discipline" — that is, "directing resources where they are most likely to yield returns," according to a recent study conducted by CFO Research in collaboration with American Express. The fifth annual Global Business and Spending Monitor included a survey of 541 senior finance executives (plus 20 in-depth interviews) at large global companies across a variety of industries in the United States, Canada, Latin America, Europe, and Asia.

Over the past decade, the term globalization has often been used to describe the actions of multinational corporations when they expanded into developing countries to take advantage of cheap labor and low-cost manufacturing. But as the survey confirms, companies are now looking to hitch their growth prospects to emerging countries. "Expanding market access" was named most often as the category where companies are most likely to increase investment in 2012, chosen by 50% of respondents.

Furthermore, when asked which areas of business activity they plan to engage in in emerging markets, 47% of survey respondents predicted that sales and distribution would increase in the year ahead (production, sourcing, and offshoring trailed behind). The probable reason: the consumer classes are rising in these economies. "There isn't really a wine culture in China yet," says Bob Ryder, executive vice president and CFO of Constellation Brands, a $2.7 billion producer, distributor, and importer of wines, spirits, and malt beverages. "But there are so many people there, and they're so aspirational. So we are focusing on China."

Home-Field Advantage
But survey results also suggest that competition in emerging markets is heating up, as foreign companies battle local ones for key resources and market share. Survey respondents from the developed economies of Europe and North America most often said that their growth prospects over the next two years would depend more on exports to emerging markets than on domestic sales. With growth prospects in mature markets flatlining, this orientation to emerging markets certainly makes sense. "In general, we continue to see a flat economy in the developed world," says Juan Figuereo, executive vice president and CFO of Newell Rubbermaid, a marketer of consumer and commercial products.

Markets companies will depend on most for growth

The survey also shows, however, that North American and European companies are likely to encounter plenty of homegrown competition in emerging markets. CFOs working in the emerging economies of Asia and Latin America most frequently reported in the survey that their growth prospects will depend more on selling within their own domestic markets than on exports.

Thus, U.S. companies looking to expand their presence in emerging markets will find their multinational marketing muscle and widely recognized brand names countered by the home-field advantages of local and regional competitors. Local companies in emerging markets have the advantage of knowing their turf — how to efficiently locate suppliers, for instance, or identify the best distributors. "Each market is different," says Mike Holt, group finance director at Low & Bonar, a performance-material maker based in the United Kingdom. "You've got to know the local markets in terms of how they function and how business is won."

Local businesses in emerging markets also possess an innate understanding of what local consumers want, unlike their foreign competitors. To succeed in emerging markets, companies have to make sure their product offerings are designed to deliver value to local customers. "What's deemed to be a good value in one market may be deemed to be costly in another," says Holt.

Collision Course
Beyond customers, these contenders will be competing for other resources, starting with employees. Slightly more than half of survey respondents (52%) say they are likely to increase their head count in the coming year. The highest proportion of CFOs who expect to hire are located in Mexico (64%), Hong Kong (60%), India (57%), Canada, and the United States (both 56%).

But it's not just the fact that companies are hiring that puts them on a collision course; the survey also found that nearly all the CFOs in the survey who are planning to hire share a common purpose. Rather than adding employees so they can restore lost capabilities or add production capacity, these CFOs want to acquire specialized skills or experience. Many will undoubtedly be seeking strong country managers who can provide a competitive edge by understanding the extreme volatility and unconventional business methods of their local markets.


Competition is likely to heat up over another limited resource — raw materials, which 29% of respondents identified as a threat to their ability to produce and deliver goods. What's more, one quarter of respondents view "rising prices for energy/fuel" as a risk. That's a critical resource for firms planning to expand. With so many businesses racing to capture a share of emerging economies' booming growth, senior finance executives certainly can't afford to let their companies stall out.

With the road to growth as crowded as it is, their competitors will be only too happy to whiz past them.


Where companies are most likely to engage in more sales and distribution over the next year


CFO Publishing Corporation 2009. All rights reserved.