Subject: Fwd: Business: A change in gear - FT (Please Read)
From: "Michael Andrews" <[email-masked]>
To: "Eric Schwerin" <[email-masked]>, "Hunter Biden" <[email-masked]>
Date: Wed, 12 May 2010 08:35:56 -0400

I sent this article and comments to our senior team this morning.  
Michael

>
> I commend this article for a close read. I believe it provides some  
> guidance on what hedge funds, portfolio investors and private equity  
> firms will be looking for  from firms like ours. Information on  
> political risk and perhaps at times on the companies structure and  
> even in some cases their technical depth. It also provides an  
> indication that we have recognized that SWF will be critical  
> investors since they have large pools of capital and are comfortable  
> with the complexity of cross border transactions.
>
>  It raises by implications that a company with our products may be  
> called upon by Brazilian, Indian, South African companies to assess  
> US, European and other developed countries political risk, corporate  
> culture and some technical analysis.
>
> MPA
>
> PS the outline of a business plan.
>
>
> Business: A change in gear
> By Stefan Wagstyl
> Published: May 11 2010 21:47 | Last updated: May 11 2010 21:47
>
>
> Pulling rank: a London cab with a Chinese makeover. The vehicles,  
> such as this one seen in Tiananmen Square, are produced by  
> indigenous carmaker Geely and the British company in which it owns a  
> stake
>
> EDITOR’S CHOICE
> Europe agrees rescue package- May-10
>
> Editorial: Markets struck by jitters - May-07
>
> Outside Edge: On the money in the 2.45pm crash - May-07
>
> Basel regulators weigh cost of reform - May-03
>
> Opinion: Plan B for the debt crisis - Apr-29
>
> Opinion: Time to press on with bank reform - Apr-21
>
> As chief executives emerge from recession they are seeing some  
> unfamiliar names  scurrying around the global corporate landscape.
>
> In Europe, Geely, the Chinese carmaker, is finalising a $1.8bn  
> (€1.4bn, £1.2bn) acquisition of Volvo, the Swedish manufacturer.  
> In Africa, India’s Bharti Airtel is set to become the world’s  
> fifth-largest mobile phone operator through the $10.7bn purchase of  
> the regional assets of Zain, the Kuwaiti telecommunications group.  
> In the US, Reliance Industries, India’s biggest private sector  
> company, is completing a $1.7bn joint venture with Atlas Energy  
> after narrowly failing in Europe with a $14.5bn bid for  
> LyondellBasell, a Dutch chemicals group.
>
> Meanwhile, after last year’s slump, exports from emerging economies  
> are recovering at break-neck speed, rising last month in China, for  
> example, by 30 per cent.
>
> Companies from emerging economies are back on the move. They “have  
> come out of the crisis better than developed world corporates”,  
> says Chris Hemmings of the PwC consultancy.
>
> These groups are climbing up the value chain with new products,  
> services and brands, ranging from high-technology Chinese  
> electronics to Indian cars and Brazilian financial services. As  
> Edward Tse of the Booz consultancy writes in a recently published  
> book: “China is no longer exclusively a source of low-cost  
> manufacturing. It is realising its potential to be far more: a  
> source of global competitors in every aspect of business on the  
> global stage.”
>
>
> The same applies to India and, to a lesser extent, Latin America.  
> For global corporates, this is an even bigger shift than the  
> emergence of Japanese groups as international investors 25 years  
> ago. The new challengers are moving faster and more aggressively  
> than did the cautious Japanese.
>
> The new multinationals are coming from countries more open to  
> foreign investment than Japan was in the 1980s. Hundreds of  
> international companies are already firmly established in markets  
> such as China, India and Brazil; developed and emerging world  
> companies are competing head on across a range of industries – and  
> co-operating extensively through joint ventures. But the rivalry is  
> becoming more intense, embracing the developed as well as the  
> emerging world.
>
> For portfolio investors, too, the game is changing. Once investing  
> in emerging markets mainly meant backing a particular economy’s  
> growth potential or its capacity to export commodities. No longer.  
> Now it means investing in businesses already ranked among the  
> world’s largest in their industries, such as SAB Miller, the South  
> African brewer; Cemex, the Mexican cement group; or Huawei, China’s  
> biggest telecommunications network equipment group. It means  
> investing in new technologies, brands and ways of doing business.
>
> Competing with emerging market companies is nothing new for  
> developed world multinationals. While they faltered in the worst  
> recession since the 1930s, they are recovering rapidly. The number  
> of emerging markets companies in theFinancial Times Global 500 may  
> have nearly doubled from pre-crisis levels of 68 in March 2007 to  
> 119 two months ago – but the majority are still from the developed  
> world.
>
> CASES IN POINT
> Asian groups making inroads at home and abroad
> Huawei
> With its library and conference rooms grouped around tropical plant- 
> filled patios, the Chinese telecommunications equipment maker’s  
> airy, Norman Foster-designed headquarters in the southern city of  
> Shenzhen could compete with those of any global technology company.  
> This is appropriate for a group that is now the world’s second- 
> largest telecoms gear maker, with $21.8bn revenues and a 14.2 per  
> cent global market share in 2009, behind Ericsson.
> Unlike banks, automakers and other Chinese companies muscling into  
> global top ranks on the back of the country’s 1.3bn population, it  
> owes its rise mainly to overseas success. “They have grown despite  
> their home market, not because of it,” says Duncan Clark of the BDA  
> telecoms consultancy in Beijing.
> With fat credit lines from state banks allowing it to offer generous  
> financing to telecoms operators, Huawei has been highly successful  
> in emerging markets besides its own, and is also making inroads into  
> developed markets.
> Competitors attribute its growing market share to lower prices but  
> many customers acknowledge that it offers greater flexibility. Where  
> some equipment makers have been marketing complete systems, Huawei  
> is willing to customise according to operators’ demands.
> Increasingly, however, it is meeting hurdles. Despite years of  
> effort, it has yet to land a big order in America. Since Ren  
> Zhengfei, the secretive founder and chief executive, is a former  
> People’s Liberation Army officer, the US continues to have security  
> concerns over Huawei equipment.
> With reassurances that it is owned by staff rather than the state or  
> military failing to convince, it has begun a campaign to win greater  
> trust. Huawei has put a managing director in Washington and is  
> making efforts to engage the media. Kathrin Hille
>
> Air Asia
> Once a failing state-owned Malaysian airline with just two aircraft,  
> AirAsia is now one of the few indigenous companies in emerging south- 
> east Asia with a brand that resonates across the region.
> Tony Fernandes, chief executive, bought it in 2001 with the aim of  
> making it the home airline of the 10-country Association of South  
> East Asian Nations, an economic and trade grouping with 580m  
> consumers and a combined economy bigger than India’s.
> Nine years after Mr Fernandes bought it for a token M$1 plus M$40m  
> debt, AirAsia boasts more than 90 aircraft, joint-ventures in  
> Thailand, Indonesia and Vietnam, and a network that extends beyond  
> Asean to China, Sri Lanka, Bangladesh and India.
> AirAsia X, a long-haul affiliate, flies to the UK and Australia, as  
> well more distant parts of India and China, bringing the group into  
> direct competition with developed country airlines such as British  
> Airways, Qantas, Singapore Airlines and Virgin.
> Starting with just $250,000 in cash, Mr Fernandes relaunched AirAsia  
> as the region’s first real low-cost airline, copying the no-frills  
> model pioneered by Southwest Airlines of the US and Ryanair of  
> Ireland.
> The company has grown rapidly because of a rigorous focus on keeping  
> down costs through lean staffing, multi-tasking, and high aircraft  
> utilisation rates, boosted by low levels of congestion at many Asian  
> airports. As a result, its costs are widely regarded to be lower  
> than those of Ryanair, regarded for many years as the global leader  
> in cost control.
> Chris Tarry, a UK-based aviation analyst, says AirAsia is probably  
> one of only three budget airlines in the world making sustainable  
> profits.
> “The model for the future,” says Mr Fernandes, is for AirAsia  
> “to go to the Middle East, to Korea, and [more comprehensively to]  
> China and India”. Kevin Brown
>
> Western, Japanese and South Korean multinationals retain huge  
> reserves of talent, technology and capital. Many have been in  
> emerging markets for decades, including Unilever, the Anglo-Dutch  
> consumer products group; General Electric, the US conglomerate; and  
> Siemens, the German engineering group. Others have joined more  
> recently, among them Microsoft, the US software giant, which has  
> established its biggest development centre outside the US in  
> Beijing; and Cisco Systems, the computer network group, which has  
> set up “a second headquarters”, Cisco East, in Bangalore, India.
>
> Davin Chor of the Singapore Management University argues against  
> over-generalising from the weaknesses of a few high-profile American  
> companies, such as the carmakers. “One shouldn’t be too bearish  
> about American companies going forward.”
>
> The same applies to European companies. The biggest cross-border  
> acquisition this year so far is the planned $35.5bn purchase by  
> British insurer Prudential of AIA, the Asian business of US group  
> AIG – a more conventional case of a developed world company moving  
> into emerging markets.
>
> Equally, some emerging market companies were battered during the  
> crisis – notably over-borrowed Russian resources groups such  
> asRusal, the aluminium group; and some Mexican companies, including  
> Cemex. “There are huge disparities in performance within sectors  
> and within countries,” says Alok Kshirsagar of McKinsey  
> consultancy’s Asia Centre.
>
> But there is no doubt which way the economic winds are blowing.  
> “From my new base in Hong Kong, the shift from west to east is  
> clearer than ever,” Michael Geoghegan, chief executive of HSBC, one  
> of the world’s biggest banks, said last week. “In developed  
> markets, the risks of double-dip recession and stagnation haven’t  
> gone away. In contrast, recovery in emerging markets looks secure.”  
> said Mr Geoghegan, who this year moved from London to Hong Kong.
>
> Driving emerging market companies are their domestic economies.  
> While developed countries’ gross domestic product contracted 3.5  
> per cent last year and are expected to record sluggish growth of  
> about 2.5 per cent in 2010, the emerging world avoided recession and  
> is forecast to bounce back to a healthy 6.3 per cent this year.  
> While policymakers in the developed world fret about stagnation,  
> their emerging market counterparts worry about inflation.
>
> The domestic demand surge is clearest in India, where incomes are  
> rising from a low base. Companies reaping the rewards include Hero,  
> a motorcycle manufacturer; Godrej, a producer of personal care  
> products; and cement makers such as India Cements and Grasim. “What  
> we find is that many Indian companies that focus on India itself  
> have done extremely well,” says Kwok Chern-Yeh of Aberdeen Asset  
> Management Asia.
>
> Asia – and especially China – is living in a credit boom that  
> contrasts sharply with the scarcity blighting western Europe, the US  
> and, to a lesser degree, eastern Europe and Latin America. While  
> there are concerns the boom could end in a bust, for now, Chinese  
> companies have cheap finance.
>
> By contrast, the emerging market companies that have suffered are  
> those in countries that followed the developed world into recession  
> – notably Russia, where 2009 output fell 7.9 per cent; South  
> Africa, (down 1.8 per cent); and Mexico (down 6.5 per cent), the  
> laggard of Latin America. Russian tycoons who borrowed heavily  
> before the crisis have been forced to sell assets to cut debts, most  
> notably Oleg Deripaska, Rusal’s main shareholder.
>
> The most visible – and most controversial – element in emerging  
> multinationals’ expansion is corporate acquisition, seen by many  
> directors as the fastest way to advance. Li Shufu, Geely’s poetry- 
> writing founder, says the Volvo takeover is the perfect antidote for  
> what his own and most other Chinese carmakers lack: technology,  
> research capability and a reputation for quality and dependability.
>
> While the overall quantity of capital flowing from the developed  
> world into emerging economies is still far greater than that going  
> in the opposite direction, in corporate acquisitions it is a  
> different story. Last year, for the first time, takeovers by  
> emerging world companies of developed world groups exceeded  
> takeovers going the other way – the former valued at $105bn, the  
> latter at $74.2bn, according to Dealogic, a business data company.
>
> “In the next few years we will see a growing number of acquisitions  
> in Europe and the United States by companies based in emerging  
> markets, es pecially in Asia and South America,” says Rodolfo De  
> Benedetti of CIR, an Italian conglomerate. “These companies today  
> have considerable financial resources and good management, and are  
> interested in entering new markets and acquiring competitors.”
>
> As well as the developed world, new corporate investment is being  
> targeted at other emerging markets – often challenging western  
> groups. The race for natural resources is particularly tight, with  
> China and India leading the way. Not to be left out, Vale, the  
> Brazilian miner, last month paid $2.5bn for a half-share in a remote  
> iron ore deposit in Guinea. For South African companies, raised on  
> links with the west, investing in Africa is a new “orthodoxy”  
> says Jacko Maree, chief executive of Standard Bank, the country’s  
> biggest.
>
> Alongside acquisitions, partnerships matter in a globalised world,  
> with scores of joint ventures already set up between developed world  
> motor groups and their emerging market counterparts. In the latest  
> case, Peugeot Citroën, the French carmaker that has lagged behind  
> other foreign groups in China, this month announced a joint venture  
> with China Changan to supplement production capacity it already has  
> in the country.
>
> However, the terms of trade bet ween developed and emerging market  
> groups are changing, with power shifting to the emerging world. “We  
> are seeing a bit of a pendulum shift. Five or 10 years ago, a  
> multinational would tell you what to do ... now working together is  
> a true joint venture,” says McKinsey’s Mr Kshirsagar.
>
>
> Cross-border deals are not easy. First, timing is crucial as  
> companies that made big-ticket acquisitions just before the crisis  
> found to their cost – notably Tata, India’s biggest business  
> group. In 2006-08, it bought Corus, the European steel group, for  
> £6.7bn in India’s largest foreign acquisition; and Jaguar Land  
> Rover, the UK carmaker, for $2.5bn. The assets plummeted in value  
> during the recession, leaving Tata managers struggling to  
> restructure their acquisitions.
>
> Next, the cultural gaps between emerging economy owners persist.  
> Chinese managers feel as alien on the Tyne in north-east England as  
> western executives do on the Yangtse. According to Tarun Khanna and  
> Krishna Palepu, authors of Winning in Emerging Markets, a study  
> published last month: “Securing and instilling global standards and  
> capabilities throughout an emerging markets-based organisation is a  
> difficult, long-term task.”
>
> Finally, there can be political barriers. Chinese state-controlled  
> companies have run into trouble in the US over perceived political  
> and security risks. A $2.2bn bid for 3Com, a US network technology  
> company, from Bain Capital and Huawei, the Chinese telecoms  
> equipment-maker, failed in 2008 when Washington objected. In Europe,  
> the ambitions of Russian state-run energy group Gazprom to expand  
> into the European Union have been contained by political concerns.
>
> But as Japanese companies found 25 years, ago these barriers can be  
> overcome. Even before the crisis the corporate order was changing,  
> with companies from China, India, Brazil and other emerging  
> economies forging ahead in global industries. Their advance has now  
> become a charge.
>
>
> Additional reporting by Geoff Dyer in Beijing, James Lamont in New  
> Delhi, Kevin Brown in Singapore, Richard Lapper in Johannesburg,  
> Adam Thomson in Mexico City and Jonathan Wheatley in São Paulo
>
>