BRIC opportunities continue to thrive

Major western companies have long viewed diversification into emerging markets as a means of boosting the bottom line, given growth has been slowing in their traditional domains: the banking crash of 2008, which had less of an impact in much of the developing world, merely served to hammer the point home.

In the case of the construction industry, for example, Global Construction Perspectives and Oxford Economics, in their joint report Global Construction 2020, note that construction in the rapidly emerging economies of Asia, Latin America, the Middle East, Africa and Eastern Europe – all collectively playing economic catch-up – is expected to double over the next decade to become a $6.7trn business. It will account for some 55 percent of global construction output: the boom is set to be underpinned by urbanisation, globalisation, infrastructure renewal and the burgeoning needs of developing ‘megacities’.

In September 2012, China’s economic planning body, the National Development and Reform Commission, gave its approval for 60 infrastructure projects worth an estimated 1trn+ yuan ($157bn): roughly one-quarter the size of the 4trn yuan ($630bn) stimulus package issued in 2008/09 in response to the financial meltdown in the West. In its recent report Achieving High Performance in the Construction Industry, consulting and technology services provider Accenture noted that Chinese construction companies – buoyed by unprecedented internal demand in the infrastructure, real estate and healthcare sectors – have consistently outperformed their western counterparts over the last three years and posted double digit earnings growth in the process.

Asian markets are expected to continue to see strong construction spending growth in 2012, according to consultants Davis Langdon: China leading the way (+9 percent), followed by India (+8 percent), Indonesia (+8 percent) and Vietnam (+7 percent). Much of the impetus will come from non-residential construction, such as upgrading (or building new) infrastructure. China continues to be the largest market in the world, accounting for 41 percent of the Asia Pacific total in 2011: almost double and four times the size of its Japanese and Indian counterparts respectively. The latter, constrained by its public finances, has increasingly been examining private funding solutions.

In 2010, four Chinese contractors (China Railway Group Ltd, China Railway Construction Corp., China State Construction Engineering Corp and China Communications Construction Group) entered the top 10 of the Engineering News-Record Top 225 Global Contractor Rankings based on revenues. In the process, they displaced North American, Japanese and European companies that had traditionally dominated this sector. Their combined revenues ($238.5bn) easily overshadowed the remaining six firms making up the top 10 ($180bn). In 2011, factoring in China Metallurgical Group Corp and Shanghai Construction Group, total contracting revenues amounted to $275bn.

As the Chinese market itself matures, many of the major players that have hitherto relied on domestic business are increasingly flexing their muscles globally. They are looking to exploit fast-growing markets not only elsewhere in Asia, but also Latin America and the Middle East: usually as part of large consortia bidding aggressively on infrastructure projects.

French connections
Increasing use is being made of the public-private partnership  business model in construction, especially in the Middle East. Governments in the region are looking to reduce their risk exposure to mega projects, as well as bringing in outside expertise. If that represents one side of the coin, food retailing, for example, represents the other. The recent decision by French supermarket giant Carrefour to offload its Colombian operations to Chile’s Cencosud for €2bn ($2.6bn), including debt, is part of a wider strategy of freeing up funds as it embarks on a three-year turnaround plan instigated by new CEO Georges Plassat. It’s also an admission of failure: the company said in a statement that it will focus on geographies and countries in which it holds or aims to develop a leading position.

With Carrefour leaving Colombia, where it had an estimated 18 percent market share against the 43 percent of local leader Exito (controlled by France’s Casino Guichard-Perrachon), the spotlight is now focusing on the company’s Polish, Turkish and Indonesian operations as it looks to reduce its debt (end-2011: €6.9bn) still further.

Meanwhile, Carrefour’s presence in Brazil – where it failed last year to merge its business with Grupo Pao de Acucar, Brazil’s largest retailer – must now be thrown into some doubt too. While Brazil is the retailer’s number three market behind France and Spain, it continues to battle old adversary Walmart across other markets in the region. On the bright side, sales growth has held up well in the region (up 12 percent in Q3) – but then it needed to, given stagnant sales in Europe.

Cencosud also recently purchased Brazilian supermarket chain Prezunic and Chilean department store Johnson’s, and has operations in Argentina and Peru as well. It will gain 72 hypermarkets, 16 convenience stores, and four cash-and-carry stores in Colombia as part of the Carrefour deal, adding to the 900 stores and 26 commercial centres it already operates throughout the region.

Brazilian markets
Even for US behemoth Walmart, Brazil has proven to be a corporate minefield at times: its short-lived joint venture with local non-food retailer Lojas Americanas, after entering the market in 1995, being a case in point. Walmart Brazil’s (WMB) strategy initially foundered: the company was eventually forced to concede that its US store format couldn’t easily be replicated in Brazil, where local demands, tastes and requirements are different.

WMB addressed the problem by introducing new store formats and bringing in more experienced store personnel. In 2004, it acquired 118 Bompreço stores in northern Brazil, followed by the 2005 purchase of 140 supermarkets in the south from Portugal’s Sonae. It’s these purchases that have driven much of the company’s Brazilian growth in recent years.

Top dog in the Brazilian retail market  remains Grupo Pao de Acucar, with an estimated 18 percent market share. It sells everything from food through to clothing and home appliances: expansion into the latter segment coming after the company bought the Ponto Frio chain from Globex Utilidades, as well as the Casas Bahia outlets. Rated number two, Carrefour has an estimated 14 percent market share, with Walmart just behind on 12 percent.

Major players in this sector are expected to benefit from Brazilian President Dilma Rousseff’s recent decision to promote economic growth by cutting taxes on consumer goods, interest rates on loans and demanding that banks, power companies and phone operators reduce prices. These measures are also likely to accelerate plans by credit card giants Visa and MasterCard to muscle in on the estimated $400bn+ credit card market, which at present is under the tight control of domestic card processers Cielo and RedeCard.

Indian protectionism
In contrast to the Latin American retail sector, the protection of local operators in India from foreign operators is still jealously guarded, given previous attempts to liberalise Foreign Direct Investment (FDI) rules that have invariably run into the political sand in Delhi. In September 2012, however, the government, in part to stave off a sovereign ratings downgrade, took another stab at it by announcing a raft of measures. These included a new FDI ceiling of 51 percent for foreign food retailers. This gives foreign investors the opportunity to take effective control of local operators, as well as opening up a market of 1.2 billion people (300 million of whom are regarded as middle-class). Previously, foreign firms were only allowed to operate as wholesale outlets.

However, foreign operators will be required to put at least half their total investment into infrastructure, such as warehousing and cold storage facilities. This is intended to reduce supply bottlenecks that can cause a third of fresh produce to rot before it even reaches the market, as well as increasing prices paid to farmers by cutting out intermediaries. They’ll also only be allowed to set up in cities with a population of more than one million and must source at least 30 percent of goods from local, small industries. Chains will certify compliance themselves. State governments will have the final say on whether the supermarket groups will be allowed to operate in their states. Foreign operators will be required to stump up a minimum of $100m.

Reflecting India’s status as a nation of shopkeepers and other small businesses, the organised retail segment accounted for just five to six percent of the total retail market in 2010, according to Booz & Company (India) Pvt. Ltd. It’s expected to grow to just 10+ percent by 2016-17. By contrast, the US has an organised retail penetration rate of 85 percent. Major local players such as Reliance Industries, Aditya Birla Group, Bharti Enterprises and Mahindra Group are already active in India. They are likely to be augmented in the longer term by foreign operators such as Walmart, Tesco, Costco and others. Organised retailing in India refers to trading undertaken by licensed retailers registered for tax, such as supermarket groups.

African expansion
In Africa, meanwhile, the growth story that is mobile telephony is likely to continue. Estimates from BMI-TechKnowledge Group forecast that total combined fixed and mobile cumulative capital expenditure made in Africa since 2000 will have grown from $78.8bn in 2008 to $145.8bn by 2015: the money set to be invested in a wide array of local, regional, pan-African and global infrastructure, services and operations. Crunching the numbers further, the mobile sector is forecast to account for over two-thirds of all cumulative investment in African telecommunications by 2015.

For mobile operators, the business case for investing is strong, given the rapid take-up of mobile subscriptions and, in the case of foreign entrants, providing alternative streams of revenue as cutthroat competition and slowing growth impacts their traditional markets. About 60 percent of these operators (estimated at 175 across the continent in Q4 2010) are affiliated with major international telecom groups as Vodafone, France Telecom, MTN, Bharti Airtel and Millicom: the balance being local players.

Analysis from consultants Frost & Sullivan, Sub Saharan African Communications Quantitative Quarterly Tracker Q3 2012, found the market had 181.7 million mobile and fixed telephony subscribers and 29.8 million internet subscribers in 2010. This is forecast to reach 266.1 million mobile and fixed telephony subscribers and 77.5 million internet subscribers by 2017.

Business Unit Leader for Africa Chantel Lindeman said: “The growth of voice and internet markets in Africa is expected to be driven by a decline in retail price for these services… Operators in the region are investing significantly in mobile infrastructure, including base stations and transmission networks. It is expected that this will result in the availability of higher network capacity at lower cost, with operators spurring growth by passing savings in network costs to the end users of services.”

Africa isn’t a homogenised market of course and relatively mature markets such as Nigeria, South Africa and the Maghreb region contrast sharply with other markets growing from a much lower base (from an investment standpoint). Regulatory regimes vary too, although the general trend is a continuation of liberalisation measures instituted in the late 1990s. Unsurprisingly, fixed services still tend to be the preserve of state-controlled monopolies while mobile markets are far more deregulated and competitive: many governments having fostered this through competitive spectrum auctions.

Despite liberalisation measures across many emerging markets, the WTO, the OECD and UNCTAD warned in a recent joint report for the G20 countries that FDI, which slumped after the 2008/9 financial crisis and subsequently staged a slow recovery, fell by eight percent in H1 2012 vs. H1 2011. Emerging economies such as India, Brazil, Mexico and South Africa are heavily dependent on steady foreign investment flows to underpin domestic development plans. The report bemoaned the slow pace of FDI recovery since 2008/09, in spite of abundant liquidity in global markets. The message is clear: emerging markets need to continue along the path of liberalisation in terms of attitudes towards FDI.