Risk Management

On Edge

What emerging Europe's CFOs know about the downturn that others don't.
Janet KersnarMay 11, 2009

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.”

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.

Fact-finding Mission

If on-the-ground finance teams need moral support, what is it that their CFOs need from them? A view of future performance that’s “not an illusion and, on the other hand, not an act of panic,” replies Han Kolff, Prague-based CFO for CEE at Danone Baby Nutrition (DBN). This often means challenging local general managers “more than in the past about their growth figures…You can’t do this from Prague for the whole region. There’s too much happening.”

Relatively speaking, the future still looks rosy for the baby food business of Danone, a €15 billion French food company. Globally, DBN’s turnover in 2008 grew 17% year on year, to €2.8 billion, and as for eastern Europe, which accounts for about 15% of total revenue, annual growth was nearly 30%. Although that growth is now slowing, “we’ll be less touched than other industries, given that we’re the last category a mother would want to [cut back] on,” says Kolff.

That’s not to say his team isn’t under pressure. “More than ever, you need finance leaders who are comfortable in their roles and competent in their communication,” he says. “Some handle this a lot better than others. It’s a time when you see the difference between great finance directors and good finance directors. And it’s not only the person, but the organisation behind them.”

But building up a razor-sharp finance organisation is as hard, if not harder, than it was during the region’s boom years. The downturn might have reduced the wage-inflation pressures, but supply still isn’t satisfying demand. “The war for talent is not over,” asserts Kolff. “In eastern Europe, it’s still hard to find people who are good technically, but also good at communicating.”

Dietz of McKinsey agrees, and reckons there’s no quick fix. “It’s a generational issue,” he says. “If you want a 40-ish, experienced executive who speaks English, there are very few. And the guys older than that will not have had the education and the guys younger than that won’t have the experience.”

Listen to Us

Yet as CEE CFOs find themselves explaining the region to head office, the importance of on-the-ground knowledge outweighs any skills gaps, at least during the downturn. “If you lose the local ownership of the decision, it’d be very difficult to motivate managers,” asserts Kolff, who notes that Danone continues to be relatively decentralised. “You could have a central policy that says we cannot ship to distributors with X amount of days overdue payments,” says Kolff. “But if you do that, you’d never be able to come up with creative solutions such as [arranging with the distributor to] send 70% of our goods while receiving 100% of the payment, so its debt is reduced little by little.” Coming up with such a solution, “is our role,” he says.

Pricing decisions also cry out for on-the-ground know-how, say local CFOs. Concerned about margin erosion, many multinationals are reacting by exerting pressure on subsidiaries to keep margins up, even if this means boosting prices when consumer confidence is sinking fast.

It’s a tricky balancing act and depends on the actions of local competitors as much as the needs of head office to defend profitability, says Yavuz Zaman, finance director of Kraft Foods Turkey, an Istanbul-based unit of the $42.2 billion American food group. Because Turkey was a hyperinflationary market until about five years ago, increasing prices was “quite usual and expected,” he says. “But in recent years, we were hesitant to increase prices, though commodity and labour costs were higher. We had to work around other instruments to maintain profitability.” Pricing, he says, is one of the biggest issues for all companies in Turkey.

This Time it’s Different
Despite these and other issues, CFOs in CEE are confident in their abilities to cope with the downturn better than they would have in the past.

Consider Adidas, the €10.8 billion German sportswear and equipment maker. Dmitriy Pokaluhin, its Moscow-based CFO and COO for Russia and CIS, recalls how, when he joined the company shortly after Russia’s financial crisis in 1998, Adidas’s local business was embryonic, like most other foreign multinationals’ at the time. “It was small and fragmented, no distribution to speak of and no clear strategy,” he says. But with a new management team appointed in 2000, the company turned a corner. As he explains, Russia’s “macro factors” allowed the entire sector to grow.

But differentiating Adidas from its peers — and helping it to grow much bigger than its rivals — was the decision, in 2003, to develop its own retail network. Though this can involve greater risks — in working capital management, for example — Pokaluhin says it also gives Adidas greater control over pricing, distribution and marketing — a welcome benefit during the downturn. Nearly ten years since the launch of the new strategy, the retail shops now generate the majority of the company’s revenue in Russia.

Of course, even multinational companies that are faring relatively well in the region are not out of the woods yet, and their fates are closely tied to how well local economies hold up, in some cases with the IMF’s help. New statistics from the Bank for International Settlements show that banks’ lending fell globally 5.4% in the fourth quarter last year — the fastest rate since monitoring began 30 years ago — and much of that decline is believed to come from western European banks curtailing loans in CEE economies.

Yet subsidiaries of multinationals with a large CEE presence say they’re able to continue spreading risks and investments across the region, focusing on the relatively healthier markets in the Czech Republic, Slovakia, Slovenia and Poland. Without being “too starry eyed” — as one regional CFO puts it — many also use the downturn to increase market share and get a greater foothold in the region.

It is possible for foreign multinationals in the region to come out on the other side of the downturn stronger than before, if their local CFOs get their way. After all, as Rigler of Mars notes, “This region has already had its ups and downs. We’re in this for the long run.”

Janet Kersnar is Editor-in-Chief at CFO Europe.