The High-Growth

Markets Summit

Driving business in
the global economy
September 20th–21st 2012 • Park Plaza Victoria, London

SUMMARY
REPORT
www.highgrowthmarketssummit.com

S P O N S O R E D B Y:


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

THE HIGH-GROWTH MARKETS SUMMIT
DRIVING BUSINESS IN THE GLOBAL ECONOMY
INTRODUCTION
For many companies, high-growth markets represent their main source of global profit growth, and potentially the main
source of revenue. As developed economies stall and the investment risks of high-growth markets diminish, investors are
increasingly looking further afield, to remoter regions within the BRIC (Brazil, Russia, India and China) economies, and to
riskier frontier markets. Their growing importance in the world economy means that businesses are being forced to rethink
how they do business in these markets, and how to restructure global operations that can no longer impose western business
models on the emerging world. These profound shifts in thinking underlay the wide-ranging discussions and debate at
Economist Conferences’ 2012 High-Growth Markets Summit, with a focus on the following themes:
• Why emerging economies have been better managed than developed markets;
• The implications for business in China as it stands at an economic and political crossroads;
• The relentless push of investors into tougher, “frontier” markets, especially in Africa;
• How localised thinking underpins growth strategies, talent, innovation and risk management; and

• The importance of innovation when servicing emerging middle class customers.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Developed markets versus emerging markets
The sluggishness of western economies
“2013 will be better than 2012 for the developed world, but
not by much” said Robert Ward, the Economist Intelligence
Unit’s Director of Global Forecasting. He struck a particularly
downcast note on the outlook for developed economies: the US
economy appears to be faring slightly better than the Eurozone,
and is seeing a very slow recovery. A recession caused by trouble
in the financial sector, however, typically takes years to recover
from, as the experience of Japan shows. US housing starts
experienced an unprecedented collapse in 2007. And there
is also the pending “fiscal cliff” for the US economy, before
investors can be sure of sustainable recovery.
If the Eurozone achieves some stability, it could see 0.4% growth. But Greece’s economy is set to contract by some 25% during this
crisis, which arguably is the largest contraction of any developed economy in history. Elsewhere, Ireland is struggling under very
high debt, while in the UK, private sector debt is higher than in Spain and Portugal. Eurozone collapse could usher in a depression.
Greece, Portugal and Italy will be the worst performing economies in the world in 2013. The performance of the Eurozone economies
will be an important factor in how emerging markets fare in the coming years.
Paul Collier, professor of economics at the Centre for Study of African Economies, Oxford University, noted that Germany is the best
run economy in Europe, because, historically, it was once the worst. In other words, lessons were learnt about profligacy, which
it would appear have still to be learnt by other Eurozone members. “The euro had just two rules, one institution and upstanding
members, but no critical mass of citizens who understand the institutions”. Thus, there is need for leadership capacity to build that
support he argued. Indeed, it was these lessons that many leading emerging markets have learnt from their own difficult past, and
that has served them well during the recent financial crisis. One such economy is Turkey.


Responsible macro-economic management in Turkey
Ali Babacan, Turkey’s deputy prime minister for economic and financial affairs, who opened the summit, argued that prudent
management of his country’s debts and deficits during the good times had allowed Turkey to weather the bad times with relative
ease.
The problem for the EU, he suggested, was that member governments had become inextricably involved in the crisis; governments
may back troubled banks, but who, he asked, will back governments when they get into trouble? Fiscal and monetary expansion is
simply not credible without a medium-term programme of structural adjustment. The problem is also that enforcement mechanisms
are not strong enough. He warned that once one country exits the euro, others will follow. Thus 2012 will be an important test year
for the EU, as well as the US in its election year.
That said, he noted that there were signs of slowdown in big emerging markets too, as risk aversion increased. But many emerging
markets, not least China, still had huge fiscal and monetary space in which to react to any further crisis. The risk was of countercyclical policies becoming too tight, too soon. A more accommodative approach may be necessary.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Turkey, however, had dodged the worst of the developed world
problems, largely as a result of a series of reforms implemented
before the 2008-09 crisis. These included: price stability,
social security, banking and healthcare reform, and better
management of public finances. After the crisis, the government
announced a three-year fiscal consolidation programme. It saw
private sector growth of over 9% in 2010, and 8.5% in 2011.
Consumer spending, bank lending and investment was also
strong, while government spending made no contribution to
growth. The OECD expects Turkey to have the OECD’s highest
growth over a five year period. The country also has an
increasing working age population, and is encouraging families
to have at least three children. Mr Babacan pointed to rapid
reductions in unemployment, especially youth unemployment.
The country had seen the greatest income redistribution in the

OECD; the highest increases in household incomes at the lowest
end (with no-one now living on less than $1 a day); and he noted
that Turkey was no longer a recipient of foreign aid, indeed it
was now a donor country. Turkey wants Istanbul to become a
financial centre, trading commodities, energy and gold, with
a new capital markets law, and the establishment of financial
courts.
The core of Turkey’s recent economic success has been fiscal discipline, hitting medium term deficit targets, and ensuring every
Turkish bank became compliant with Basel III capital adequacy rules—all undertaken during the good economic times. Household
debt was low, the current account deficit peaked at 10% in 2011, and with credit growth slowing, is expected to be 7% in 2012.
External demand is balancing slower domestic spending.
The relatively good performance compared with that in the EU has not undermined the importance of the EU to Turkey’s future.
The controversial question of EU membership negotiations is important because external pressure helps Turkish governments
to implement rule of law and enhance democracy. Fulfilling EU requirements represents the clearest evidence of the country’s
democratic status. But when Turkey joins the EU, or even what sort of EU it joins, is still open to debate.
But Turkey’s economic opportunities go beyond the EU. Mr Babacan noted that Russia provided excellent business opportunities,
especially in tourism (with some 3m Russians visiting Turkey annually). Exports to Syria, however, are suffering. Any solution to
Syria civil war must be within international law, though the absence of any UN consensus on the crisis means that Turkey is now
working closely with the Arab League, he says.

“If there is no external anchor for Turkey, then we are afraid that
momentum of the political reforms in the country will diminish…
it is still our big political will to continue the process [of EU
accession].”
Ali Babacan, Deputy Prime Minister of Turkey.

Brazil’s economic achievements
In a similar vein of responsible macro-economic management, Brazil’s minister of finance, Guido Mantega, outlined his government’s
economic successes, forecasting annual GDP growth of 4-4.5% for the next few years, compared with below 3% growth in the OECD.
This forecast is based on solid foundations of effective economic policies, political stability, a dynamic external market, and strong

demand for energy and commodities especially food.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Public debt has gradually declined to below 35% in 2012 which
has allowed the government to pursue counter cyclical policies.
Consumer expansion in recent years has added some 50 million
citizens to Brazil’s middle class. This has helped boost retail
growth to 7.5%, and create some 2.2m jobs, with unemployment
falling to 5.3%.
Low interest rates (with scope for further reduction) has
boosted investment and consumption, and lowered the
currency. He said that quantitative easing is ineffective if done
in isolation. Taxes were reduced on payroll, eliminating a 20%
payroll tax. Some 40 sectors saw tax reductions, worth R30bn
($15bn). Construction and shipbuilding are expanding. Oil and
gas group Petrobras is invested some $43bn last year, and there
is a massive infrastructure programme to develop airports, rail
and roads, including concessions for 10,000 km of railways, and
8,000 km of roads. Moreover, much of the stimulus plan has still
to be implemented.
These policies have helped to attract some $67bn of foreign direct investment (FDI) last year, more than flowed into the UK or
India. Government bonds yields at 2.7% are converging with US spreads. Mr Mantega agreed that high commodity prices and credit
expansion had helped, but private-sector credit was still only 50% of GDP, one third of levels in the US, and oil price are expected to
remain high, ensuring the sector’s profitability over the medium term.

CHINA AT A CROSSROADS
Slowing growth
The biggest doubts regarding macro-economic performance was about China. The country was said to be at a crossroads, with

important political changes taking place in the leadership of the Communist party. There is no underestimating the seismic changes
happening to China’s place in the world, agreed panellists. By 2020 it will be the largest economy (in PPP terms); indeed, five of the
top 12 economies in the world will be in Asia. But the country’s development model is outdated. Its economic growth will slow to
7-8% this year, as success will depend on increasing domestic demand. There are also problems with over-production, reflected in a
so-called “Beijing bubble”. This is the result of the extraordinary process of mega-urbanisation. The country’s construction capacity
could build a city the size of Rome every two weeks. In addition, over the next decade, many cities will become “middle class”, in
income per head terms.
Gerard Lyons, chief economist at Standard Chartered Bank, believed that China was concerned about inflation pressures, and export
problems spreading to the domestic market. China’s outgoing premier Wen Jiabao, in a recent speech, offered relatively little in
the way of economic growth for the Chinese, who had perhaps become “spoilt” by recent high rates. The economy, however, was not
collapsing, just cooling, he reckoned, and said that there was lots of room for policy manoeuvre. True, gloom seems to have spread,
but this amounted to uncertainty not pessimism. This is a middle income rapidly trying to become a high-income country, he said,
and it will take more than a 5 year plan to raise domestic spending that far.

“The big challenge is that China is a middle income country and
wants to become a high income country and that is a very big
task. … The three most common words in the last decade were
‘made in China’; in the next decade it will be ‘bought by China’”
Gerard Lyons, Standard Chartered Bank.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Eswar Prasad, professor of trade policy at Cornell University, focussed on the country’s internal and external imbalances. A current
account surplus of some 10% of GDP had created an external imbalance, though this was expected to be only 3% this year. But
investment led growth had created an internal imbalance, and this was still a problem. Spending had been effective in the wake
of the crisis, but it was now hard to get the policy mix right for the longer term. Certainly, there was a need to retain some policy
flexibility should the US, or Eurozone economies create more problems.
He noted that it was hard to talk about “good” or “not good” performance. What rates should investors be expecting anyway, he
asked. A sustainable rate of 7-8% over the medium term is certainly not bad.

Mr Lyons added that it was also important for investors to understand what was behind these headline GDP numbers. Regional
differences are huge. The authorities’ main policy hope was for wages to rise as the economy moved up the value chain and for
investment and production to shift inland. China has moved from “made in China” to “bought by China”. But the country still needs
better skills, which will take a lot of work and time. And there are also demographic pressures to consider, such as low birth rates,
ageing, and a gender imbalance.

Political uncertainty
The economic outlook, however, rested upon certain political assumptions, and these outcomes were less clear. The leadership
struggles in the Communist party were hard for outsiders to read. For example, it is still not know when the important party congress
will be held, or who will get appointed. But the assumption that incoming party leaders are not reformers is not necessarily
correct. The big economic issues are discussed openly by Chinese academics and think tanks. The views of external organisations
were also deemed important: it was important for the government that, for example, the 12th Five Year Plan obtained some kind
of independent endorsement from the World Bank. The government takes seriously comments and advice that calls for greater
innovation in the economy. Current policy plans are unlikely to change significantly, and reformers saw opportunities to influence
policy. It was noted that China’s Five Year Plans are not something that get casually abandoned, but get implemented with great
effort. If the plan calls for 7% growth, then there’s a good chance that this target will be met, said a delegate. New provincial heads
will also push to achieve regional targets. One might even argue that the lack of democracy might help the government hit its
growth targets.
Nevertheless, one cannot be complacent about reaching growth targets. The economy is still run from the centre, and the financial
system is repressed. It was argued that the system works well for big banks and politicians, who are powerful, and resist radical
change. Implementation, even without the democracy, continues to pose problems. There will be setbacks along the way. It was
noted also that the government wasn’t entirely unshackled by popular opinion. Twitter is spreading, and even the President reads
influential blogs. China is much more transparent than it was, say, 15 years ago.

Tense international relations
China’s foreign relations also present an important dimension to the growth story. Alejandro Jara, deputy director general of the
World Trade Organisation (WTO), said that China still had some way to go in its economic reforms in the world trading environment.
The country was the object of most trade complaints in the WTO, which is not entirely surprising – the more trade, the more disputes,
he noted. Much of the problem lies in implementation of rules. China’s appetite for globalisation is strong, but it was approaching
trade deals bilaterally and regionally. This makes it hard to align a patchwork of such trade relations with WTO arrangements, and as

such was suboptimal, but at least the country is moving in the right direction of freer trade.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

The issue of trade is increasingly tied up with relations with the US, especially the impact of the close US presidential race. With
US unemployment at 8%, and slow job creation, China will remain a potent issue during the election campaign and beyond. US
Republican presidential candidate, Mitt Romney, has suggested strongly that China was a “currency manipulator”, and should be
confronted on this. However, it is a hard case to make given China’s falling surpluses, and the appreciating Renminbi closer to fair
value. There doesn’t seem to be huge market pressure on the currency to appreciate. Over the long term, it will continue to rise
gradually over the next few years, simply as a result of growth differentials, anyway. Financial inflows are probably a more important
factor on its current rate. Broadly speaking, the currency is more or less fairly valued.

“China’s currency is like a dog you take for a walk on a leash,
sometimes the dog is ahead and sometimes it lags behind.”
Alejandro Jara, WTO.

As well as trade relations, it was also said that the impact of international events, climate change or security issues should not be
ignored. Tensions in the South China seas could get out of control. Politics could spill over to affect production. For example, a
threat to the supply of rare earth products could harm companies reliant on vertical supply chains in China.

Next wave opportunities: China’s cities, Vietnam and the Next 11
For investors wary of China’s rising costs or competitive market, they have the option of moving to inland cities, where “tier 3” or
“tier 4” cities are relatively unserved and growing at around 13%. They remain some 5-10 years behind eastern seaboard centres.
Consumer tastes don’t always derive from 1st tier cities, and there is some variations that are not always visible to western eyes,
according to Stuart Ferguson of the China-Britain Business Council. Less obvious advantages – such as a nearby specialised
technical institute or certain natural resources—should also not be overlooked. Patience is required when dealing with less
experienced officials, and firms can be offered investment incentives that are at odds with central government policies, which can
create legal problems later on, says Tracey Wut, a partner at law firm Baker McKenzie.


An alternative is to move to lower cost countries, such as Vietnam. Truong Chi Trung, Vietnam’s vice-minister of finance, presented
his country’s macro-economic achievements. Average GDP growth over the past half-decade had been over 7%, although it had
recently slowed to 5.5%. FDI amounted to 18% of GDP. Inflation had slowed from 14% to 6%, and the authorities expect to keep
annual price rises in single digits. Macro-economic stability, in the post-crisis period, was deemed a priority, achieved through
fiscal discipline. Spending has been boosted but the government deficit has fallen from 6.9% in 2008 to 4.9% today and will be 4.5%
by 2015. A tax-friendly environment, regarding corporation, consumer and environmental taxes will help, as will export promotion
efforts.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

The government wants to access international markets over the next decade. Of some 10,000 state-owned enterprises, there
are now only 1,300 in government control. The government will retain stakes of 50% or 55% in some of these, with state control
focussed on defence and public utilities. Eventually, it envisages having just three or four very strong state enterprises. FDI is seen
as being very good for the economy by helping to restructure industries, so privatisation will involve foreign investors, he said. As
for state-owned commercial banks, the government will restructure these operations, before deciding their future. The government
also want to preserve a social safety net, providing the poorest some healthcare, income support, job training and credit for small
businesses.
Vietnam was one of several next wave markets that were on investors’ radars, according to Katie Koch, managing director and senior
strategist at Goldman Sachs. The bank’s “Next 11” (or N11) emerging markets (comprising Mexico, Indonesia, Turkey, South Korea,
Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines and Vietnam) had as a group outperformed any other category of frontier
markets over any period in equities, she claimed. Goldman’s was particularly bullish about the first four countries for, amongst
several reasons, their strong demographic, health and taxation profiles. She believed that these markets would help push global
growth above 4% once conditions in developed economies improved.
There was some debate about what constituted a “frontier market”. They were often characterised by high state interference,
commodity reliance, poor governance, weak democracy and corruption. They were also hard to access for portfolio investors. The
big corporations such as Unilever or Coca-Cola were the best vehicles for success in these markets. Financial investors would also
face poor liquidity and a risk of hubris that would misprice risk. Charles Robertson, global chief economist at Renaissance Capital
reckoned that frontier markets will rapidly follow a similar path of earlier reforming nations over the past centuries. He noted how,
for example, a simple “ease of doing business index” produced by the World Bank had, by ranking countries, spurred reforms to the

business environment, and allowed these economies to access a huge global market. As Julian Mayo of Charlemagne Capital, noted,
it’s the rate of change rather than the current state of affairs to which investors should pay attention. And nowhere is the impact of
reforms more remarkable than on the African continent.

The great African renaissance
It was the outlook for sub-Saharan Africa that captured
greatest interest throughout the summit (accounting for
almost half of the plenary sessions). Several perspectives on
the continent’s future were presented, including that of the
academic, the development agency, the foreign investor and
local entrepreneurs.

Legacy, transition and potential
Once regarded as “the hopeless continent” after two lost
decades, Africa has enjoyed 10 good years. Sub-Saharan Africa
will be the fastest growing region in the world, according to
EIU forecasts. Wolfgang Fengler, lead economist at the World
Bank, referred to the four “Y”s of demography, geography,
policy and technology that have transformed much of the
continent. Demography includes rapid population growth,
declining mortality, urbanisation (cities, as engines of growth,
will account for over half of the population by 2023). Others
had noted that the average age on the continent is only 18,
compared with 32 in Asia and 39 in Europe, which will have
major business implications. Telephony has become much more
prevalent in recent years, and not just for making voice calls.
The economic policy environment has also improved radically,
which (with the exception of Zimbabwe) has produced good
growth performances.
Paul Collier, economics professor at Oxford University, argued

that our assumptions about risk and return in the three key


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

blocs, OECD, BRICS and frontier economies, had now changed. It was a fantasy, he said, to expect 12% returns in the OECD, and that
there is no advantage to be gained in the BRICs - everyone knows about them already. Even frontier markets don’t provide very high
returns, (in the mid teens or possibly 25%). The interesting story, he asserted, was about the risk side of the investor’s equation.
It is wrong to think that OECD is safe, as stagnant economies cannot be bailed out by growth. And firm level risk is high too, with
many so-called zombie firms. But risk assessments of frontier economies are also misunderstood. Zambia’s first sovereign bond was
oversubscribed, offering only 5.6% - lower than bond yields in Italy or Spain. Zambia is quite representative of African risk: a “soso” democracy, with natural resources” (in Zambia’s case, copper).
One indication of Africa’s potential lies in the fact that its subsoil assets per square mile are $60,000, about one fifth of that
in the OECD, which indicates huge amounts yet to be discovered, especially oil. Growth in Africa is much safer. With significant
improvements in governance, and prudent macro-economic management, the continent was resilient in the global financial crisis.
Africa was “the dog that didn’t bark”, he noted. With a strong commodities export sector, non-tradeable capital goods demand
will be very high, especially in construction, which is growing faster than natural resources. Others also noted that there are
huge productivity gains to be had in consumer goods and retailing, commercial agriculture, and transport infrastructure. Light
manufacturing is already moving out of China to low wage Asia (such as Bangladesh) and will move to coastal Africa, not least
because of its good access to both OECD and China. China will not have the field to itself. Its biggest advantage in Africa has been
speed. But Canada, Europe and Brazil are also becoming big on the continent. Much land acquired by foreign powers simply as a geopolitical insurance policy in a crisis, was “a big stupid play”, Mr Collier said.

“Africa weathered the macroeconomic shocks of 2009 very
resiliently because cumulatively they made little steps towards
prudence… The dog that didn’t bark, internationally, was that
Africa didn’t fall apart.”
Paul Collier, Professor of Economics, Oxford University.

Simon Susman, non-executive chairman of Woolworths, believed that the legacy of colonialism persisted in many countries, and
the more recent it is the harder it is for a country to move on. But investors should look for those countries that have shrugged off
their Marxism for market thinking, are less xenophobic, and accept a free press, he said. Another good sign is the returning diaspora,

which include many top people. This is a continent where a modern, savvy consumer is emerging. It points to an aspirational tipping
point, a feeling that: “I want it and I can get it” amongst new consumers, said Mr Susman.

Investing and exit strategies
Many new competitors are entering the market to capture this new consumer. Zain Latif, founder of TLG capital, is already invested
in Africa. His focus is on healthcare, given the high proportion of disease in Africa, including cancer, AIDS and malaria. He confirmed
worries about the difficulty of accessing frontier markets through private investment portfolios. While it’s always possible to find
something to invest in, it’s very difficult to create shareholder value and exit, which is why the private equity structure doesn’t work
well there. Local banks lend at 30% because of inflation, making it hard to build a business within fixed timelines. Many smaller
funds entered in 2005-08 but managed only a couple of deals.
That said, it’s important to publicise success stories, so investors see beyond the traditional view of the region as an oil and gas
opportunity – which can be hard for investors to get exposure to anyway—and see its burgeoning middle class, which is easier
to access. There is also a tendency to balk at political risks. He mentioned Uganda which presents many good opportunities, but
mainstream investors won’t go there (perhaps deterred by news stories of Joseph Kony and the LRA) and will wait until someone else
shows that it can be done.
He noted that it can be hard to capture a market when people don’t have bank accounts. Nevertheless, African consumers will
spend on healthcare, housing and education. So investors may see good returns in those sectors. Even insurance can be profitable:
Nigerians spend only US$0.05 per capita on policies, so there’s scope for life insurance, especially as premiums can be reinvested.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Diversification is essential, as at least one market will be in a crisis at any time. It is also important to be country focussed, rather
than vaguely referring to “Africa”. It’s a hugely diverse continent in many ways. One might also apply such distinctions to cities
rather than countries, according to a panel on African cities. Rapid urbanisation has made Lagos, Johannesburg, Nairobi, Kigali
and others important business centres in their own right, and led to opportunities in services, retailing and property, as well as
excellent opportunities to invest in infrastructure. The future may lie in public-private partnerships to get key infrastructure built.
Despite the influx of the young into urban areas, skills shortages, and the lack of flight or rail connections between African cities
was seen as among the biggest frustrations for investors.


The African entrepreneur
Probably the biggest success story in Africa is Nigeria’s Aliko Dangote, founder, president and chief executive officer of the Dangote
Group. Titled Africa’s richest man, Aliko Dangote explained how to be an entrepreneur in one of the most promising markets in the
world. He began trading in 1978 in Nigeria. A family loan which he repaid in three months allowed him to trade in sugar, rice and
commodities during the 1980s, then textiles and banking. His 13 factories produced a range of products, including flour and pasta,
and also a joint venture with Coca-Cola.
Around 2005, the company attempted to work with cement giant Lafarge, but couldn’t agree terms, so he took a bold leap to
compete, opening a cement factory in southern Nigeria. It acquired over 40% of the market in two years. The company quickly
expanded across Africa, investing in and upgrading old processes, for example in Liberia, Sierra Leone, Cameroon, Gabon, Congo,
Tanzania and elsewhere. The company expects to produce 60m tonnes in sub-Saharan Africa over the next couple of years. Cement
now accounts for some 80% of Dangote’s business. The group is moving into agriculture, encompassing vertical or backward
integration including irrigation. It is linking up with expert partners, in Asia to acquire refining businesses. Faith in the African
market is evidently stronger than ever, with huge investment plans, including some $7.5bn for petrochemicals projects. There are
significant resources of limestone, near Abuja to exploit. The company expects returns on investments of at least 30%.
But there are challenges. Lack of infrastructure is one. The company plans to build west Africa’s first, 18-metre, deep-sea port, and
will venture into logistics—it already owns 6,000 trucks—while lack of reliable power supplies means that the company needs to
become a power producer too. The company’s interest in steel and gas pipelines also require that adequate infrastructure, especially
ports and roads, be in place.
Corruption is another problem. Western
governments are helping to clamp down on
dishonest officials. The company also sponsors
seminars and advises governments on reducing
corruption. It is possible to do business
without being corrupt.
Good government relations are important,
but you don’t need political connections
to do business. There are one-stop shop
investment bodies, for example, to help
investors. Governments can make life easier
for big investors, especially when trying to

resolve problems. For example, investment in
agriculture is deemed vital for the continent’s
development, so many governments in the
region will compulsorily purchase private land
if seen to be in the public interest of developing
agriculture. A government crackdown on the
Islamist terrorist group Boko Haram, which
may have been responsible for a 3% drop in
turnover, has helped suppress unrest.
A good name is also vital. When Dangote
proposed a $600m investment in Tanzania, for
example, officials assumed it was a scam, until
the investor’s reputation and its $2+bn net


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worth became known, whereupon official doors opened and factories were set up. Similarly, plans to list in London, are aimed at
building the Dangote name globally. The group already accounts for 26% of the Nigerian stock market, so London provides liquidity,
and ensures better corporate governance, which will help sustain the firm’s reputation internationally. The company’s balance sheet
is already strong, with no bank debt and plenty of internally-generating cash.
Many of Mr Dangote’s observations were echoed by fellow entrepreneur, Zimbabwean Strive Masiyiwa, founder of Econet wireless.
The rapid growth in telephony has made Africa “the connected continent.” He believed that this extraordinary growth (where not
long ago 70% of Zimbabweans had never even heard a telephone ring) could be replicated in other key sectors, especially energy and
transport. Political leaders are being advised to build infrastructure and develop skills, and as a result capital is flowing in. Although
many Chinese jobs are shifting to cheaper Vietnam and other lower cost Asian countries, potentially 100m jobs could go to Africa if
its infrastructure improved.
It was considered vital that young Africans do not see money only in mining and commodities, but elsewhere, and recognise the
tremendous innovation outside of the primary resource markets. As in any sector, you must have knowledge and competition to
realise the opportunities. It’s not just EU or US investors, but intra-regional investment from other African countries. Currently,

22 African countries have annual average income per head of $1,000 per year, and around 400m people are deemed middle income.
Although the business environment in individual countries has improved markedly, it is a great challenge to do business across
more than one country. Econet works in some 17 countries, but only three are French speaking. Skills shortages are another barrier.
Disappointment often arises because investors think it’s just one country. When thing go wrong, a common response is “we’re not
doing Africa again.”
Perhaps most importantly, the continent is expanding the “rule of law”, rather than the “rule of men”, said Mr Masiyiwa. Private
sector investors have often exacerbated this problem, in seeking an audience with ministers, rather than insisting on effective
courts and police. “The low hanging fruit has been consumed; the heavy lifting” [i.e. creating effective courts and police] must now
begin” he noted.
Bribery is another often-cited issue, but Mr Masiyiwa said that his company has never paid a bribe, even in Nigeria which bears a
poor reputation for such practices. If you expect to pay a bribe, then you will be quick to produce one; and it’s not necessary, he
argues. There are plenty of good, honest business people, but one has to have the right partners and the right information.

“People expect to have to pay a bribe, so are quick to produce
one that they actually compound the situation. If you know how
to operate and recruit the right people, you don’t have to pay a
bribe…. We need to expand the rule of law, rather than the rule
of men.”
Strive Masiyiwa, Econet wireless

In short, panellists agreed that Africa is not going backwards. Although “crazy guys” can be found in any continent and oil
exploitation could reinforce some of the old bad ways, the whole continent will go forward. A stable Africa can be growing annually
at around 6%.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Business strategy, innovation and the middle class consumer
Localisation in markets, risk, talent and innovation
Where to invest may depend as much on the location of the investor as the attractiveness of the target market. That at least is an

issue surrounded by common misconceptions, according to Pankaj Ghemawhat, professor global strategy at IESE Business School. It
is not enough simply to identify the fast growing economies in the world, and start to trade there. He argues that bilateral trade is
still determined by four fundamental attributes: a common language; a common border; membership of a trading bloc; and a former
colonial relationship. His research suggests that two countries sharing a language will double trade flows. If they share all the above
attributes, then trade will be some 16 times greater than between countries that do not. For example, US retail giant Walmart’s top
foreign markets include: Mexico, Canada and the UK. German carmaker BMW is rare in having over 20% of sales coming from each
major region, but production, employment and management are very German. Your strategy cannot be based on the fact that there
are a lot of Indians and Chinese, but rather you must consider your common relationships with that market, he argues.

“If you go far from home believing that every place is just like
home, the farther you get, the more trouble you are going to find
yourself in….[However] differences once you identify them aren’t
just a constraint to be adjusted to or overcome, but a huge source
of value creation”
Pankaj Ghemawat, IESE Business School

To enter these markets requires a flexible state of mind. Companies must think in terms of “Adaption, Aggregation and Arbitrage”.
Walmart faced restrictions in India which forced it to change its business strategy there by focussing on the supply chain. That left
the retailer well-placed to benefit now that India’s retail sector is being liberalised. Adapting to different business environments
can result in significant value creation, for example, shifting your company’s decision makers to Asia. Now, with some $50bn-70bn of
products sourced from China, Walmart can make cost savings of some 10% globally.
The issue of distance is crucial for Honeywell too, when thinking about
how to scale up its business in emerging markets. Shane Tedjerati, chief
executive officer of global high growth regions at Honeywell, asked: “How
do you make a management system work, 10,000 miles away?” The answer
for Honeywell was that 70% of decisions are made locally. This policy
allowed Honeywell to grow its China business tenfold over the last decade.
Headquarters needs to agree this autonomy at the outset, and stop constant
monitoring of progress, especially as high-growth markets can experience
severe downturns in the short-term, warned Anil Gupta of Maryland

University. It is essential to find and trust the right person, and leave them
to it, says Mr Tedjerati who advised his local managers that it’s “better to
ask forgiveness afterwards, than seek permission beforehand”. “If you come
with a command and control mentality, you’re dead” agrees Rajeev SinghMolares, executive vice-president of Alcatel Lucent’s Asia Pacific region.
“Get headquarters onside, but at a distance” he added.
Localising strategy was seen as equally important in risk management. A company’s local “resilience” to risks can determine how
well those risks can be mitigated. This requires investors to “map out” and then “reach out” to stakeholders. Risk management isn’t
always about ensuring compliance with the regulatory environment, but part of a general trend towards localisation, in which your
businesses is integrated into the local environment. In this way, a company’s presence in a market becomes more nuanced, not just
about products and profits. You have to engage with locals, deeply, whatever business you are in, said Tim Mitchell, chief executive
officer of FrontierMEDEX. For example, covering the medical needs of say a malaria-prone community will be cost effective if it
keeps your staff and surrounding businesses healthy and working. If locals view a mining company that helps solve its most pressing


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

worries, then it will be easier for that company to handle future risks to its brand. But it can be difficult for an investor to embed
itself effectively in a community if the company is being managed from faraway headquarters. The problem is often one of internal
management, and a clash between “values-based” and “rules-based” or compliance-driven approaches to risk management. One
way of overcoming this tendency is to incorporate the idea of values-based risk into the early training of new recruits supported by
cross-functional team discussion and data.
Getting the right balance between local and global was even more pertinent
in the area of talent, leadership and innovation. One common concern
expressed was whether talented executives could rise beyond the limits of
their own country operations, as the top leadership of many corporations
were too often dominated by home country nationals. According to Mark
Schneider, chief executive officer of Fresenius, how does one achieve greater
diversity at senior levels while maintaining the corporate identity across the
organisation, especially in a rapid growth environment? Matt Barney, vicepresident of Infosys Leadership Institute, said that the company has had to
focus on managing an employee’s soft skills, not simply his numbers, and to

do so without using a hard metric. Other factors to consider in developing
emerging market leaders included an executive’s sensitivity to cultural faux
pas, and a general openness to continual learning and new experiences. A
good balance between local and global outlooks could also be achieved by
giving managers a regional as opposed to a local or global role. One example
of sensitivities to be aware of was the adoption of “time-zone democracy”,
according to Mr Schneider, that ensures all offices in any time zone are
treated fairly when scheduling cross-border meetings.
Frugal innovation also typifies the localising challenges of global corporations, and could represent a major commercial threat for
those companies who were unable to master, or at least understand, it. For those in emerging markets, frugal innovation is not a
management fad, but part of the mindset, “the DNA, of many Indians”, according to Jaideep Prabhu, director of the centre for India
at the University of Cambridge. It is a means by which billions of bottom- and middle-of-the-pyramid citizens are brought into the
global economy. Perhaps the most important factor supporting this process has been greater “connectivity” in mobile telephony
said Ajay Mishra at Nokia Siemens Networks. Research by Rita Gunther McGrath, professor at Colombia Business School, suggested
that western companies find it particularly hard to achieve innovation-driven growth, but she advised that it is best done on small
budgets.

Developing a consumer goods strategy
“How do you find the balance between mindlessly global and hopelessly local?” asked Sanjay Khosla, president of developing
markets at Kraft Foods, whose “5-10-10 strategy” (5 cateogries, 10 brand, 10 markets) has been an important approach to product
launches in emerging markets. This involved giving a “blank cheque” to local executives to develop product ideas (albeit within a
set framework). The response of staff, typically “starts with scepticism, then fear, and then produces good ideas.” For example, the
company was planning to delist its Oreo biscuit brand just five years ago; but the strategy has helped it grow into a $1bn business.
A company has to be locally competitive, and that is achieved in part by investing in talent quicker than your rivals do. You need
leaders who are locally connected and globally aware. It’s important to consider who you are picking for your team (corporate people
or new recruits). Diversity of cultures gives you a competitive advantage.
The “blank cheque” strategy doesn’t always work. In Latin America, a hyper-talented team developed a nutrition product that failed
twice, and was pulled. But the team learned lessons from the episode, and the leader was promoted.

“How do you find the balance between mindlessly global

and hopelessly local?””
Sanjay Khosla, Kraft Foods


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

THE GREAT EMERGING MIDDLE CLASS CHALLENGE
Identifying the emerging middle class
The world’s emerging middle class presents a monumental opportunity for FMCG and luxury goods firms that are prepared adapt to
the very different conditions discussed. As well as a local perspective, a long-term view and a flexible business model are essential
for success.
Emerging consumer markets could be worth $20trn by end of the decade, said Frank Braeken, executive vice-president of Unilever
Africa. Definitions of “middle class” of course vary: some define it as earning $2-20 per day. Alexis Karklins-Marchay, co-leader of the
emerging markets centre, Ernst & Young, refers to $2-13 at purchasing power parity (PPP), or even $10-100 day, which would include
some 1.8bn people, a number that could triple in a decade or so. This would also have a huge environmental impact which will force
companies to develop new, innovative business models and products to cope.
For now, attention is focused on understanding the consumer. Unilever has been targeting the middle classes for a century, and Mr
Braeken noted that it’s easy to underestimate these consumers: they are often very demanding, and spoilt for choice. One needs to
have a “lean, mean, sharp strategy” he said. This means getting to the consumer before he’s middle income, with cheaper products
“Waiting for him to come to you is probably a losing strategy”.

“The easiest way to capture that emerging middle income
consumer is to be there when he’s not yet middle income … you
must give him cheaper products, reach down, reach up and reach
wide. Waiting for him to come to you is probably a losing strategy.”
Frank Braeken, Unilever.

Mr Karklins-Marchay says that the old view of emerging market business, ‘Shanghai, Mumbai, Dubai or goodbye’ no longer applies.
The number one challenge is affordability, then physical reach. You need to be creative, such as using Shakti women to distribute
your products in rural areas.


“We used to consider the emerging markets as: ‘Shanghai,
Mumbai, Dubai or goodbye’…. Today there are so many markets
of interest.””
Alexis Karklins-Marchay, Ernst & Young.

For Richard Monturo, vice president of marketing at Volvo Car Corporation, the challenges are at the upper end of the consumer
spectrum. He agreed that it is necessary to focus on class mobility. The average age of its Chinese customers is 37 years old, 10 years
younger than in the West. This means targeting consumers in their mid-20s. One can learn a lot from the Chinese parent company
about entry-level buyers. Focus groups reveal a greater consumer awareness of features, because buying a car is a relatively big
expenditure for them. But while we are seeing a change in economic terms, cultural values may still be old and markedly different
from those in the West. One has to speak directly to Chinese or Indian cultures. One cannot expect them to adopt western values.
“We must take off our western glasses” said Mr Monturo.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Adapting your product offer
Therefore, Volvo dealerships require high service to be bundled into the
product. Customers negotiate aggressively, so the company must recruit
good sales people. The service side is very tough, and good people will be
poachable. Similarly, Unilever’s service is about giving more. In Brazil, if you
buy a Hellman’s product, a recipe will be printed on your receipt. In China,
customers can engage in conversation with in-store “beauty advisers” about
skin care products, a service which for many is “as important as the product”.
But there’s also great variety. Indians spend much less on beauty products
than Brazilians do, so your offer must also vary depending on the region.
Consumers don’t necessarily want local brands, but “relevant” brands. There
isn’t necessarily a “local versus global” dilemma. Most consumers don’t even
know what is local or not. However, “heritage” does influence the consumer,

and local firms are usually better able than foreigners to access deeper
consumer insights.
For example, there are many reasons why a consumer might go for a locallymade rather than an imported product. With cars, some want the “otherness”
of a car coming from elsewhere; others want the easier access through a local
dealership. Or it might just come down to local taxes. Brazil has a 30% luxury
tax which has forced car companies to produce inside the country. It’s a
market in flux, and we will see many more brands being developed and tested
in emerging markets, and then brought back to developed markets. Firms
“must move from: ‘think globally act locally’ to ‘think locally act globally’;
and scale up once you have the insights”, says Mr Braeken.

The Latin American consumer
There are few places where the new middle class spending boom is more extraordinary than in Brazil. Luiz Eduardo Melin, the
managing director of BNDES, Brazil’s state development bank, explained the context for the country’s consumer explosion. Family
debt did not as expected constrain consumption – the problem was the supply of credit, not the demand, and credit continues to
increase. The labour market is something of a “a seller’s market”, so rising real wages has created huge spending potential which is
spreading regionally as well as socially. The government’s own massive spending plans of some $1trn over the next three years, on
infrastructure and housing, coupled with private investment in the energy sector will feed into more consumer spending.
Randy Millian, president of Latin America and the Caribbean, for drinks
group Diageo, said that the company is expanding by some 15% annually in
the region, by growing its product portfolio, innovation and acquisitions.
Brasil Foods, which produces turkey, hams, sausage etc. said it has sustained
average annual growth of 7-8% for the past 15 years, focusing on ready-to-eat
convenience, and appealing to the wide variety of tastes across the country,
whether this means stronger flavours or less salty margarines. Consumption
is still based in metropolitan areas, but the company wants to expand to
non-urban populations, and get to ports and harbours for export. Traffic
congestion and infrastructure is a persistent problem, especially for the “last
mile” of distribution. Products have to be moved by expensive truck. Diageo
faces similar issues, but of course they ship their bottles one way only, so

faces only half the difficulty.
Diageo see an attractive consumer market elsewhere in Latin America too,
including Mexico, Peru, Colombia, Dominican Republic, Venezuela. The big
concern is a shortage of talent, especially finding staff with an ability to
take risks and deal with unknowns. Colombia is doing very well with the help
of trade agreements, and has strong domestic food companies, making it
“occupied territory” for Brasil Foods, which will have to acquire an existing
operation there.


THE HIGH-GROWTH MARKETS SUMMIT 2012 SUMMARY REPORT

Brand building was also seen as key in anticipation of middle class demand. Echoing fellow panellists, Mr Millian advised: “Make sure
you build brands, because the middle class is aspirational and will eventually get to you”. The internet is very important for brand
building, though this can be hampered by low speed internet connections. There are many competing brands from the emerging
world, which can be acquired to access domestic markets. One has to “look for the little jewels and then develop them” says Mr
Millian. In some cases, where locals do not trust their own brands, one can import them, such as in food and beverages.
Kraft’s Sanjay Khosla captured much of the discussion about emerging consumer strategy, saying that while mistakes inevitably are
made, companies should invest in people and brands, fix problems before scaling up a business, keep faith, stay positive, celebrate
success, and learn from failures.

CONCLUSION
Finally, Daniel Franklin, the chair of the summit, summed up the challenges of emerging markets in Olympian terms: “faster,
higher, stronger.” The transition from the old global economy to the new economy has been faster than anyone imagined. The bar
for success is being set ever higher, now that everyone seems to be drawn to riskier frontier markets; and companies need to be
stronger, by understanding how to operate in these markets and how to apply new insights in all sorts of ways.


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