Archive | April, 2012

Financial Director: What are CIVETS economies and how can SMEs exploit their potential?

26 Apr Turkey - an SME emerging market sweet-spot? Grand Bazaar, Istanbul - 2006

My latest piece for Financial Director magazine, in its May 2012 issue – a really enjoyable romp through the CIVETS economies and chatting to a few FDs of British businesses that have done business in these economies, with their tips on how to proceed. The big win is for UK Trade & Industry (UKTI); I didn’t add in all the big-ups it got from all the FDs I spoke to, but almost no one thought about going into these markets without having some support in the UK or locally from the government agency. HM Government useful? Shurely shome mistake….

Turkey - an SME emerging market sweet-spot? Grand Bazaar, Istanbul - 2006

Turkey - an SME emerging market sweet-spot? Grand Bazaar, Istanbul - 2006

Banks sell their goods and services all over the world, which is why their charges are good at dreaming up catchy acronyms to group together the regions from which they hope to profit. The eponymous Bric acronym is probably the best known work of Goldman Sachs economist Jim O’Neill. Now we have the Civets – grouping Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – an acronym coined, depending on who you believe, by HSBC chief executive Michael Geoghegan or the Economist Intelligence Unit (the latter launched its first fund dedicated to equities in the Civets nations last year). Both believe these countries to be the next big thing.
The HSBC fund tracks up to 60 of the biggest listed firms in the six member countries, in sectors such as consumer goods, financial services, telecoms and energy. Indonesia, Turkey and South Africa account for 75% of the fund.
“We see the future as being in emerging markets. They don’t have the debt problems that we have in the developed world, that is one positive characteristic,” Philip Poole, HSBC’s global head of investment strategy told BBC News. “We think the consumption story will really be emphasising emerging market demand, and those population dynamics are very important in this.”

While emerged economies including the UK, those in Europe and North America are deemed to be in a long period of stagnation, Civets nations are perceived to enjoy adequately reliable and sophisticated regulatory, political, financial and legal systems, young populations and a fast-growing middle class. The perfect storm for all that Western money and business seeking a new home – but does this mean there are opportunities for all sizes of British businesses?

First of all, the government has made commitments to help SMEs access emerging markets in order to hit ambitious export-led growth targets. This February the Department for Business, Innovation and Skills said it would help 50,000 SMEs break into exporting into “high growth” markets by 2015, offering financial and diplomatic levers to assist those businesses.

The reason Civets economies are central to that aim is easily illustrated by the figures. Half of Turkey’s 72 million inhabitants are under the age of 28 and its economy is expected to be the second-fastest growing in the world by 2018; 900 British companies already operate in Egypt where they are poised to exploit an expected doubling in the population over the next 25 years; South Africa’s infrastructure investment programmes provide a huge opportunity to companies that can contract expertise, goods and services into them over a generation or more. Empire rebuilding back home by way of bolstering our growth companies abroad is the prize.

It is the relationship piece that most SMEs feel unequipped to deal with, with many choosing to pay an agent to do the job.
“We were specifically targeting the defence market, so we needed someone who could clearly demonstrate to us their expertise in that field. It was pretty important to show pedigree in helping companies with those sorts of deals,” says Alun Jones, who as finance director for Faun Trackways lined up a local agent in Turkey when the business had the opportunity to tender for a government supply contract in 2011. That business now represents 50% of the company’s annual turnover. The level of contractual detail required by the Turkish government and its requirement for technical maintenance manuals in Turkish meant the agent proved essential.

“Our needs were to interpret the tender, which was written in Turkish and translated into English, to understand the actual technical documentation within the offer and interpret what the customer’s real requirements were,” Jones says. “I think the tender would have been impossible without the agent – we just didn’t know what the customer wanted or the way tender and post-tender documents are expected to be structured in Turkey. They’re a very detailed people, so you really need to pay attention to that.”
In addition, Jones had trouble securing finance for the €19m (£15.6m) deal because he received an open letter of credit, not a closed one, which is something he says is common in Turkish government contracts.

Despite historic political upheaval in Egypt over the last year, the UK remains the country’s largest foreign direct investor with investments of about £13bn. The transition government has signalled a wish to speed up economic reform along with the formation of a new democracy in order to attract more outside investment, but already high inflation alongside political uncertainty tops the agenda for the next year. That said, thereafter it is expected that the Egyptian economy will grow at 3%.

Its highly mobile, well-educated youth is an important part of Egypt’s business opportunity. But a second reason economies like Egypt or Turkey appeal is that they provide a relatively hospitable back door into the emerging potential in neighbouring, harder-to-access countries in Asia and the Middle East. Jones says that while he was FD at Faun Trackway, the company landed a contract to supply temporary helipads to the Colombian government’s anti-narcotraffic forces. It viewed that as a gateway into the US market because those forces are bankrolled by American state budgets. And with regards to South Africa, prime minister David Cameron has backed the African Union’s idea to launch an African free trade area by 2017, which would simplify and standardise trade tariffs and infrastructure among member states. By accessing South Africa now, some think British SMEs will be ready to exploit that opportunity.

In reality, though, South Africa is a difficult prospect for SMEs. Forthcoming elections are expected to herald a couple of years of political risk and business interruption. Government infrastructure contracts might be hard to access without breaking the 2011 UK Bribery Act, because requests for bribes are increasing in state procurement processes at both provincial and local government level, says Natznet Tesfay, head of Africa forecasting at risk intelligence outfit Exclusive Analysis.

In addition, Tesfay adds, violent protests are likely to increase and intensify ahead of ANC’s elective conference this Christmas and the 2014 general elections. These upsets pose “particularly high” risks to cargo, roads and railways, and blockades on the motorway linking Cape Town’s international airport with the city as well as at major ports. This on top of average wage increases between 7% and 30%, negotiated by powerful trade unions, makes exploring the country very costly and risky – and demonstrates the flip-side of exploiting an emerging middle class.

The ‘I’ and ‘V’ in our latest acronym provide more balanced opportunity. Both countries are designated by UKTI as high-growth markets. Exports from the UK to Indonesia grew by 25% between 2010-11 to a value of £438.9m, bolstered by a fast-growing, affluent middle class of about 45 million people. Despite high inflation, Vietnam recently became a middle income country and saw industrial production grow by 16% in 2010, the latest figures held by UKTI. Both nations are constituents of another new emerging markets acronym, Vista – Vietnam, Indonesia, South Africa, Turkey and Argentina.

Business Voice, the magazine published on behalf of the Confederation for British Industry, reports that in 2010 the UK signed a strategic partnership deal with the Vietnamese government, setting a target of $4bn (£2.5bn) in bilateral trade and $3bn in British foreign direct investment by 2013. But as always, there is less cash to fund these ambitions than SMEs could use while domestic demand and credit are depressed.

London’s ‘junior’ stockmarket Plus, a small business itself with a market capitalisation of less than £4m, is a classic example. Plus successfully attracted listings from central Asia but the time and cash ploughed into roadshows in Vietnam and Indonesia has not yet brought any business home.

“Those markets are not quite ready in terms of foreign exchange rules, for example. We were premature, but there is still a lot of interest from those companies,” says Vivienne Cassley, who runs business development for Plus’ primary market.
“We only have two business development staff and we just don’t have the resource to do much outside the UK: even that takes a lot of time and resource.”

Ian Thompson, finance director of offshore and outsourcing business at Harvey Nash, recently returned from a trip to the recruitment consultancy’s new business in Vietnam. The company launched its outsourcing arm there 11 years ago, and branched into executive search out of the same office last Autumn. Beneath the rave economic reviews a sea of red tape persists.
“The government only gives out licences to operate in certain types of markets, so we needed to extend our existing licence to include recruitment services,” says Thompson. “Getting that extension was our biggest problem; it took about six months from start to finish just to secure it.”

The Vietnam business is run by local managers, from the director and the finance director through the ranks, taking advantage of the supply of local graduates with good English who have worked for global brands. That makes navigating bureaucracy and cultural differences easier, and cheaper.

“On the finance side in Vietnam we hired locally from PwC; plus there are already recruitment companies here offering services in finance and accounting, which works similarly to the UK, and English is reasonably well spoken among the Vietnamese business community,” says Richard Ashcroft, Harvey Nash’s group finance director. “We’ve been able to find a reasonably high calibre management team, and they help us liaise with government officials.”

Thompson adds that Vietnam’s government encourages businesses like his because it will give foreign companies operating there an ear.

“Though it’s a communist government it is certainly a capitalist economy, so in terms of things like setting tax policy Vietnam isn’t afraid to experiment,” says Thompson. “When at the end of 2011 their economy was tightening a little, they introduced a limited tax holiday to encourage spending. It’s a government that listens and reacts.”

A business the size of Harvey Nash may have more resource to exploit emerging economies. But as an experienced FD who has traded into two of the six Civets markets, Jones’ advice to go with an agent is wise.

“You need a bit of knowledge as to how to access those markets first,” he says. “No one is going to come knocking on your door for the business; you have got to knock on theirs,” he says.