PricewaterhouseCoopers report examines source of emerging company’s success
14 April 2008 - CEOs of companies in emerging markets around the world are confident they can maintain high rates of growth funded primarily from internal resources rather than relying on outside investment, continuing the trend toward convergence of developed and emerging economies.
A new report from PricewaterhouseCoopers "Convergence & Differentiation: What is success in a connected world?", launched at the World Economic Forum’s on Latin America meeting in Cancun, finds that growth in emerging markets is outstripping that of developed nations, blurring traditional economic distinctions. In addition to the well-established emergence of the BRIC economies (Brazil, Russia, India and China), intra-regional trade and investment is fuelling explosive growth in such countries as Indonesia, South Korea, the Philippines, Singapore and Thailand.
"The economic strength and confidence of the emerging markets could at least partially offset the impact of economic slowdowns in the developed world. The flow of capital, goods and labour among emerging economies is now growing faster than trade between emerging nations and developed countries. The expanding connections of the economies in the developing world could insulate them from the worst impact of a downturn in the US and Western Europe," said Samuel A. DiPiazza Jr., Global CEO of PricewaterhouseCoopers.
Trading more with other emerging markets
The report noted that since 2000, emerging markets have run a current account surplus and have exported capital to the rest of the world. Emerging markets have also driven the number of initial public offerings (IPOs) to record levels worldwide, with 70 percent of all IPOs in 2007 coming from emerging economies. And emerging economies now account for 45 percent of world exports and have amassed 75 percent of all foreign exchange reserves.
Risks
CEOs of companies in emerging economies identified a number of risks to continued growth. They noted that a slowdown in the developed world could slow commodity exports, while fallout from the credit squeeze in the United States could impact local financial markets. Longer term, CEOs in emerging market were sensitive to the potential impact of global climate change. Emerging-market CEOs believe more strongly than their counterparts in developed economics that governments should take a leadership role in determining strategies to combat global warming. They believe
the developed world should accept more responsibility for the costs to correct its impact, an opinion shared by CEOs in the developed economies.
Funding growth from internal sources
Asked how they would fund growth, most CEOs from emerging-market economies said they would rely on internally generated cash flow. The debt market ranked a distant second as a source of capital. The equity markets, divestiture of existing assets, and accessing private equity and venture capital ranked far behind. Of the 14 CEOs interviewed in depth for the report, none said that access to capital was a barrier to growth, citing their company's strong credit ratings and a continued influx of foreign capital.
Differentiation
The PwC report identifies three sets of "strategic drivers" that contribute to the success of companies in emerging markets and enable them to differentiate themselves in an increasingly converging world. These differentiators are asset-driven, including financial strength, brands and people; process-driven, including supply chain and innovation; organisation-driven, including governance and structure. Ironically, the report found that often the very factors that make companies in emerging markets unique and successful are viewed by some outsiders as limitations.
For example, because emerging markets once faced difficulties in attracting capital, companies became adept at building internal capital reserves and maintaining healthy credit ratings. They also developed disciplined financial structures that serve them well today as their home markets grow quickly and attract foreign investment.
People
As emerging market companies become larger and more complex, they need to recruit and retain more qualified employees, a difficulty in many growing markets. Nearly 90 percent of CEOs in emerging markets said the "people agenda" was a top priority for them. However, significantly fewer said their time was best spent on Human Resources issues and a minority thought their companies were capable of making the change needed to compete for talent.
The report also addresses cultural, structural and business networks components of organisations. It finds that in some cases, traditional "command-and control" structures associated with family enterprises, gives them the agility necessary to succeed in the current business environment.
Government
According to the report, most emerging market CEOs perceive government as more of an obstacle than a pathway to private-sector development. Emerging-market CEOs more strongly factor in regulatory concerns when making business decisions than do their counterparts in developed economies. Yet, 30 percent of emerging market CEOs believe that current governments are creating a business-friendly environment, slightly higher than the 24 percent of CEOs from developed economies who think likewise.
Note to Editor:
"Convergence & Differentiation: What is success in a connected world?"
www.pwc.com/emergingmarkets was developed by PricewaterhouseCoopers to provide a framework from which to view the successes of companies based in emerging markets. The report, the first in a series of reports on the emerging markets, drew on the insights of PwC partners and associates as well as PricewaterhouseCoopers 11
th Global CEO Survey, which questioned more than 1,100 CEOs worldwide. The survey was launched in January, 20008 at the world Economic Forum annual meeting in Davos, Switzerland. For more information go to
www.pwc.com/ceosurvey.
The survey data were re-analysed for this report on a country level as well as by developed vs. emerging economies. The developed nations were defined to include 19 economies including the United States and Canada, 15 in Western Europe, Japan and Australia. Emerging economies include 31 territories including Brazil, Mexico, India, China, Turkey, Russia and South Africa. They were chosen because of the size of their economies as well as to give reasonable geographic coverage around the world
In depth interviews were conducted with select group of 14 CEOs from key emerging, markets to test the model and to gain additional insights into the successes of emerging market companies. They were drawn from six of the largest emerging markets in different regions of the world and from diverse industries from mining to media.
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