Companies large and small are asking how they can break profitably into markets that were once exotic, if not dangerous, but are increasingly being seen as the engines of present and future world growth. China, India, Russia, parts of South America and even more politically sensitive areas such as Iraq and Iran may look tempting because of their economic growth prospects, vast emerging consumer markets and natural resources, but how can a young, ambitious company hope to make money there?
That there are potentially rich pickings in these emerging markets is beyond doubt. China, with a population of around 1.3 billion, is fast turning itself into the new ‘workshop of the world’ and generating a consumption-minded middle class in the process. As the third largest European exporter to China, the UK boosted exports there 28 per cent in 2004 to £2.4 billion, while imports rose 28 per cent to £10.6 billion. India’s population is on a similar path and is expected to overtake China’s in ten years, with trade between the UK and India running at around £4.5 billion a year.
Emerging markets offer growth beyond compare
China’s economy grew at 10.5 per cent in 2004 and last year’s growth is expected to have been in the same order. India is growing at around seven per cent a year. Russia, with a smaller population of 148 million but busily building itself into a resource-rich powerhouse, has seen its economy expand more than six per cent a year and UK exports there reached £1.4 billion in 2004.
Latin America is also rich in resources, with countries such as Brazil striving to flex their economic muscles. Oil-rich Iraq offers the potential of a huge reconstruction programme when (and if) the military situation eases. Iran, despite exchange controls and ever-present political animosity, is keen to rebuild a resource-rich economy with significant local technical skills.
By contrast, the USA, though still the world’s largest economy, is showing economic growth of less than four per cent and slowing. The Eurozone and the UK have been crawling along at less than two per cent annual growth.
Whether you want to export, invest, set up production facilities or form a joint venture, those who have established themselves in new overseas markets say profits can be hard to come by, but are well worth the effort once achieved. You need to take account of currency movements, the costs of trading instruments such as letters of credit, insuring against ‘country risk’ and the usually higher banking charges involved.
See also: Launching a business in another country – how to approach international expansion
But Ian Moore, head of international propositions at HSBC, a bank with strong representation in most of these markets, speaks for many in insisting expansion opportunities in these areas are not only the preserve of big multinationals. ‘Young and small companies are by no means ruled out,’ he insists, ‘just don’t expect to land your biggest order on your first visit.’
Before putting a foot on the expansion ladder, be prepared to adjust your company culture, business strategy and even products or services, to accommodate the idiosyncrasies of doing business in each of these countries.
Mind your manners
James Holmes, chairman of Europasia Education, is developing English language and other education and professional training institutions for a Chinese population thirsty for Western knowledge. He believes, ‘China is a very exciting market, but only if you enter carefully and choose your partners with care.
‘The Chinese see it as very prestigious to team up with a Western group. In fact, businesses are under so much pressure to do so that employee promotions can depend upon it. But you need to tread very carefully, preferably with local staff and a local office. Don’t think you can go over for a fortnight and do the rest by phone and email. There is truth to the notion that the Chinese prefer to do business face-to-face.’
Holmes contends it is helpful to have outside advisers, backers, suppliers or even creditors from Hong Kong, Singapore, the UK or USA, as well as local friends. In what remains the Communist People’s Republic of China, he points out that, ‘Chinese business combines an entrepreneurial, market–driven approach with strict regulation, so deals often need the approval of local authorities after they have been signed.’
Protocol is all-important. ‘Manners and how you relate are vital, and seemingly small gestures matter a great deal,’ argues Holmes. ‘Traditionalist Chinese business leaders will give a slight bow and you must do the same. Then hand them your business card with both hands. Using one hand is rude.’
Initial meetings are likely to be with people who are not the decision-makers, says Holmes. ‘They will agree to everything you propose, but the real decision will be taken at the meal afterwards.’
These meals are crucial. ‘That’s when the real issues are raised. You must accept a drink and you must be ready to exchange presents.’ Holmes says these gifts should not be too cheap nor so lavish as to look like bribes. ‘They should be tokens but not tacky ones.’
You can expect an agreement to be signed ‘at a surprisingly early stage,’ continues Homes, ‘but that is only the beginning of negotiations. It means, “We want to work together and we have agreed the outlines, now we shall negotiate the details”.’
At this stage, it’s advantageous to draw on the skills of knowledgeable outsiders, familiar with Chinese accounting and other systems. If your deal involves making an investment in China, you must set up what is called a ‘wholly owned foreign enterprise’ in China and ensure you obtain all the appropriate licences, which ‘are needed for everything,’ says Holmes.
Finding good advice
It’s easy to grasp the importance of good advisers and partners who are local to the target region, but is perhaps less easy for the uninitiated to find them. Investment adviser Piers Hartland-Swann from MacArthur & Co says lawyers and accountants with the right experience can put you in touch with the right people, though for a fee, naturally.
The Government’s UK Trade & Investment can help with background information and official contacts, and also advise on trade missions that companies can receive public money to join. The London Chamber of Commerce helps small and medium-sized companies, as well as lawyers and others, with seminars and trade missions. Banks, local British Chambers of Commerce and British embassies and consulates can also play an important role.
For exporters, obtaining payment from these new frontier countries can be difficult and less smooth than in more established markets, while companies operating in the countries themselves must take care to comply with all procedures to repatriate profits.
If you are considering starting a manufacturing operation then one major concern, argues Hartland-Swann, is having your intellectual property stolen. ‘You can set up a plant overseas and then find your managers over there have set up a copycat factory down the road, using your product design or systems.’
And do not bank on the law solving the problem. Legal recourse on IP theft in burgeoning economies is not common and many experts suggest a solid local partner can be more effective than the courts, helping with official procedures to protect your inventions and representing your interests in the event that your copyrights become infringed. Some companies with overseas operations protect themselves by keeping research and development in the UK.
‘India’s business community tends to see a negotiated contract as a starting position for renegotiating,’ says Hartland-Swann. This view is echoed by Richard Healey, boss of UK-based Platinum Mining Corporation of India, which is developing deposits in Orissa state. ‘You need to be astute,’ he warns. ‘India is harder to crack than Russia or China.’
In Healey’s experience, the usual business approach in India is to be extremely polite. ‘If you say the wrong thing or are rude, they won’t react outwardly but they will withdraw support.’
An Indian partner is crucial to your chances of success in the country, insists Healey, but, he adds, ‘A few families tend to control what happens in India and unless your local partner has powerful family connections, things won’t happen.’
Healey recalls he was able to do business with a local cable company because his local managing director had the right connections. But such affiliations can be tricky. Once you’ve allied to one powerful family, Healey asserts, ‘It’s not easy to deal outside them and sign up a new joint venture partner. Family approval is necessary: there are a lot of nuances in India.’
See also: Why should UK businesses expand into India now? – what sort of businesses have the best chance of succeeding and what they should watch out for before expanding into the country.
To interpret these nuances, experts suggest you need a key person on the ground. ‘Knowledge is power in India,’ says Healey. Fortunately, he adds, ‘Brits are popular out there and compared to China, the level of education is vastly superior — 60 per cent of the population are educated to a UK standard compared with only ten per cent in China.’
Political factors can also play a part in the success of your expansion plans, nowhere more so than in Russia. Recent antics of gas giant Gazprom have not inspired confidence, nor has a bitter fight over alleged expropriation by tycoon Roman Abramovitch of half a Siberian oilfield, owned by fellow tycoon Chalva Tchigirinsky’s British company Sibir Energy.
However, deals can still be done. For example, Celtic spin-off Victoria Oil & Gas clinched a potentially lucrative gas distribution deal from West Medvezhye in Siberia. That contract owed much to contacts forged by Victoria’s executive director Bill Kelleher, former production chief at Yukos, a Russian corporation attacked in President Putin’s battle with the ‘oligarchs’. Kelleher, who was in Yukos’s head office when soldiers came for its computers, kept his network and remains on good terms with Gazprom.
Specialist investment adviser Christopher De Vere Walker hints that Russia’s resurgent anti-Semitism may have influenced the Yukos affair, because of suggested Israeli funding. He argues Russians welcome Western investment, viewing it as more stable than local support.
Irish entrepreneur John Teeling is another with experience of political perils in business, with energy and mineral prospecting companies in Iraq, Iran and Bolivia. His lieutenant David Horgan runs Petrel Resources, which has won some contracts in Iraq.
‘In Iraq,’ he says, ’we focused on local technical people and impressed the Iraqis by bringing in expatriates from elsewhere in the Middle East.
‘We basically wormed our way in,’ he recalls. ‘We took medical books to hospitals and so on. The Middle East values courtesy and they don’t like to say no, so if you keep on turning up and making your presence felt, sooner or later they’ll give you something in return.’
It helped that Petrel did eventually secure some big company backing, but Horgan says it is tricky and can be ‘very dangerous’ to try to get in with a local ‘fixer’ as your patron, since they will probably have as many enemies as friends. Helpful in this area are corporate ‘sugar daddies’, which are not originally local but usually Western oil or equipment companies with local experience. In Iraq and Iran, Horgan says you must also be ready to take time and dazzle with technical and financial expertise.
In Bolivia, Teeling’s Pan Andean company was quick to cuddle up to Evo Morales, the left-wing leader who swept to power in December’s elections. Horgan argues, ‘A small company can support anti-imperialist rhetoric to get deals.’
On the age-old question of bribery, most companies in all these new markets publicly claim it brings more risks these days than rewards when trying to get ahead, and the UK Government strongly warns against it. It’s usually illegal in these countries and is an issue on which your local partner or adviser should be a valuable guide to the realities.