Fonte CIBAM – Centre for International Business and Management
Reportage by Roumiana I. Theunissen
Proceedings Friday, July 8th 2011, Murray Edwards College, University of Cambridge
The Vice-Chancellor of the University of Cambridge, Prof. Sir Leszek Borysiewicz, extended his warm welcome to the delegates to Cambridge and to the Symposium on ‘BRICs and Beyond’, and thanked the sponsor, Diageo, for making this event possible. He remarked that he receives many invitations to speak at various events, but was “particularly pleased to be here”.
The Vice-Chancellor explained that the Symposium focuses on the economic importance of the emerging world – Brazil, Russia, India and China, but also the many countries following them in economic development. He observed that the term ‘emerging economies’ was coined at a time when these economies contributed one-third of global GDP; now, they contribute more than half, and indeed they have contributed four-fifths of real growth in GDP in the last five years. Therefore, the Vice-Chancellor remarked, understanding these economies has never been more important.
Prof. Sir Borysiewicz then discussed the apparent shift in the centre of gravity, which seems to be moving away from the West and the ‘Old World’. He noted that in Europe, Greek default seems overwhelmingly likely, and just two days before the Symposium, Portuguese debt was downgraded to junk status, and the private lenders were urged to contribute.
Moreover, in the United States, President Obama called a meeting of both Republicans and Democrats for talks on raising the US debt ceiling, noting that a default on debts in the USA was also possible unless Congress mandated increased borrowing.
Meanwhile, the VC observed that not all is rosy in developing economies either, and that shorthand acronyms mask a tremendous diversity of context and of financial health, and they do not often act in concert with their best interests. Furthermore, the risk of these economies overheating, although variable, is significant, and in particular Brazil and India of the BRIC economies, and Argentina, are in the spotlight.
The Vice-Chancellor concluded that what all this amounts to is that there is “more going on” in international economics, with more at stake, and that “understanding the pressures, the contexts, and the opportunities will be vital, if we are to navigate these turbulent seas”.
In this context, Prof. Sir Borysiewicz discussed the role that universities, and Cambridge in particular, can play. He explained that the University can find strong partners in the BRIC countries, and it has to embrace and engage with them. Cambridge University can’t do without a strong understanding of the BRIC countries, where they are going, their ambitions.
The Vice-Chancellor then examined the question of what the place and role of a traditional, ancient institution in the oldest of old-world countries should be in this debate about the new and emerging. He highlighted the importance of education, and the fact that this year the four BRIC nations provided 1,061 Cambridge students between them, many of whom will return to their home countries and contribute to their economies. He also emphasized the importance of education about these issues, and the need to build partnerships for quality research, by involving business and industry and overseas universities, to discover more about how these economies work. The Vice-Chancellor noted that Cambridge Judge Business School is at the forefront of trying to develop this relationship, and Centres such as CIBAM have a crucial role to play. Lastly, universities like Cambridge have a role in sharing understanding. It is in this spirit that Prof. Sir Borysiewicz concluded his welcome address, and wished the Symposium the best of success.
Dr Christos Pitelis, Director of the Centre for International Business and Management (CIBAM), welcomed the audience and gave a brief introduction to the Symposium. He explained the special significance of this event, which celebrated 15 years of continuing collaboration between CIBAM and Diageo, whose former CEO, Mr Jack Keenan, is CIBAM’s Patron, and whose President for Europe, Mr Andrew Morgan, is a CIBAM Global Advisory Board Member and sponsor of this event. The Symposium would provide a platform to explore the challenges and opportunities for business, provided by the rise of the BRICs (Brazil, Russia, India and China), and other rising powers, such as the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and the “Next Eleven” (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam). The event would build on the discussion of the January 2011 Distinguished Lecture and Panel on ‘China and the Rise of the BRICs’, and would also serve as the European launch of WPP’s BrandZ Top 50 Most Valuable Brazilian Brands.
Dr Pitelis then discussed CIBAM’s role and activities. He explained that CIBAM is a network of business and academics, the first Centre within Cambridge Judge Business School, established in 1995, which explores the conditions for sustainable value and wealth creation and appropriation in the semi-global, knowledge-based environment. Indeed, he said, “economic sustainability was our agenda from day one”.
Dr Pitelis elaborated that the Centre identifies links between practice, theory and policy, exploits dispersed knowledge and creates new, in order to derive “good” practice and provide advice on “good” policy. He described the Global Business Symposia as CIBAM’s main forum, aimed at promoting dialogue on cutting-edge topics, and whose proceedings are disseminated through various publications and podcasts. Dr Pitelis also praised the CIBAM Board for its foresight in selecting relevant themes for the Symposia far in advance and being able to predict events long before they occur. He joked that academics tend to be five years behind, while business is three years ahead. For instance, CIBAM Board Member Mr Jonathan Garner predicted the financial crisis back in 2007, which CIBAM debated at its Symposium on ‘Global Finance’.
Following this introduction to CIBAM, Dr Pitelis turned his attention to the specific theme of the Symposium – ‘The BRICs and Beyond’. He described the rise of Brazil, Russia, India and China, as well as the new rising powers (CIVETS, Next-11), as a “paradigm shift” in terms of its diversity (geographical, institutional, political, business practices, developmental models) and the potential impact on business, geopolitics and governance. He argued that the rise of the BRICs challenges prevailing notions of governance and strategy at all levels – corporate, public/national and supranational. For example, the emergence of the “Beijing Consensus” presents a challenge to the “Washington Consensus”. Another example is the growing dominance of the BRIC countries in the business of hosting international games, such as the Olympics and the FIFA Football World Cup.
At the same time, however, Dr Pitelis also identified remaining challenges for the BRICs. He observed that in terms of global FDI, China is still at 6% – a far cry from the 50% US peak in 1967 and the British peak in 1914. Moreover, he pointed out that there are emerging demographic pressures, precarious property markets, and that Chinese brands have been slow to develop. Dr Pitelis also remarked that the ability of India to develop a more diverse economy and the developmental prospects of Russia, Brazil and the “next ones” remain under question. He highlighted sustainability – environmental, social, and economic – as the critical issue for the BRICs in the long term, and re-emphasized that a major focus of CIBAM is on sustainability. Dr Pitelis argued that the trillion dollar question was the sustainability of China’s economic growth, and what would happen if China became Japan or slowed down.
He pointed out that in a recent Financial Times article by Martin Wolf (June 14, 2011), Premier Jiabao himself was quoted as saying that the Chinese economy is “unstable, unbalanced, uncoordinated and ultimately unsustainable”.
Therefore, Dr Pitelis concluded that the central question that remains to be answered is whether the BRICs and the “next ones” will keep rising, and how this will impact the global economy. He expressed his hope that the CIBAM Symposium on ‘BRICs and Beyond’ would contribute to answering this question. Finally, Dr Pitelis explained the programme and introduced the first speaker, Mr John Hawksworth, who would set the scene for the day’s discussion.
Setting the Scene
The BRICs and Beyond: Prospects, Opportunities & Challenges
By way of setting the scene for the Symposium theme, Mr John Hawksworth, Chief Economist, PwC, presented the findings of PricewaterhouseCoopers’ 2011 report on ‘The World in 2050’. The key results pertain to the relative growth rates and size of economies by 2050, as well as relative average income levels.
In setting the agenda for his presentation, Mr Hawksworth explained that he would look at these findings, and the key conclusion of the study that the global financial crisis has further accelerated the shift in global economic power to the emerging economies. He would also discuss what might derail growth in the emerging markets and the implications for business, in terms of both challenges and opportunities that this changing world order poses.
The series of reports on ‘The World in 2050’ began with a study in 2006, which covered the 17 largest economies in the world, based on GDP at PPPs (World Bank estimates). It included the G7, plus Spain, Australia and South Korea, as well as the E7 economies (the four BRICs plus Indonesia, Mexico and Turkey). The 2011 study was extended to include Vietnam, Nigeria, South Africa, Saudi Arabia and Argentina.
Having explained the background to the study, Mr Hawksworth discussed the methodological approach. The essence of the GDP growth model used is that long-term trend growth is driven by four key factors: investment in physical capital, working age population growth (based on the latest UN population projections), increases in human capital (proxied by average education levels), and catch-up with US productivity levels (at varying rates).
Mr Hawksworth clarified that the results are not forecasts of what will actually happen, but rather indicative growth potential, assuming broadly growth-friendly policies are followed (bearing in mind that some countries may not be able to sustain such policies in practice). The broad conclusions of the study on the shift in global economic power from the G7 to the E7 emerging economies should, however, be robust to these uncertainties, in the absence of major, catastrophic shocks that may derail the overall global economic development process.
Mr Hawksworth then talked about the relative size of economies, and the advantages of looking at both GDP at purchasing power parities (PPPs) and GDP at market exchange rates (MERs), explaining that GDP at PPPs is a better indicator of average living standards or volumes of outputs or inputs, because it corrects for price differences across countries at different levels of development. However, GDP at MERs is a better measure of the relative size of the economies from a business perspective, at least in the short term. Mr Hawkworth noted that the E7 economies are doing significantly better when measured in dollar terms at market exchange rates (MERs), than in PPP terms. He showed, for instance, that in India and China market exchange rates are still not that high but purchasing power parity is strong.
Mr Hawksworth then looked at UN projections of working age population growth, and referred to the effect aging has on economic growth. He remarked the limitations posed by China’s ageing population and the fact that China’s working population will not grow as fast in the future, due to its one child policy. The populations of Russia, Japan and Korea, are also expected to age rapidly, with implications for their growth potential.
Mr Hawksworth then turned his attention to the relative projected growth rates to 2050.
According to the PricewaterhouseCoopers report, emerging economies are set to grow much faster than the G7 for the next four decades. Moreover, the global financial crisis appears to have further accelerated the shift in economic power to the E7, as it hit the G7 much harder than the E7 in the short term, and it also caused revisions in estimates of longer term growth in the G7, especially in the UK and US, whose debt-fuelled growth in the past few decades now looks unsustainable. Consequently, PwC expects the E7 to overtake the G7 in terms of GDP at MERs as early as 2033 (revised from the 2006 report, which predicted this would happen only in 2042), and based on GDP at PPPs, total E7 GDP could exceed the G7 GDP before 2020. Thus, by 2050 E7 economies could become larger than G7 economies in both PPP and MER terms. Mr Hawskworth showed projections that China could overtake the US by 2020 in PPP terms, while in MER terms it would be in the early 2030s. Furthermore, by 2050 China, the US and India could be by far the largest economies (with a big gap to Brazil in 4th place). Other emerging economies could also see significant growth by 2050, with Brazil becoming bigger than Japan; Russia, Mexico and Indonesia bigger than Germany or the UK; and Turkey could be of similar size to Italy. However, looking at income per capita levels as an indicator of relative living standards in different economies, the PwC study observes that the E7 economies will still remain some way behind the G7 economies on this basis even in 2050.
Based on these projections, Mr Hawksworth discussed the risks, challenges and opportunities for business. He listed potential risks that could derail growth in the E7, specifically macroeconomic and political instability, for example overheating and property bubble in China, the problem of a mighty government bureaucracy and fiscal deficit in India and Brazil, over-reliance on oil and gas revenues in Russia (at the expense of high-tech investment), drug-related violence in Mexico, and political risks in China, India/Pakistan, the Middle East and Indonesia. Additional risks pertain to energy, water and transport infrastructure constraints, the threat of protectionism, and issues around natural resources and the growing demand for food, metals, etc. in relation to the global warming debate.
Yet, Mr Hawksworth still sees huge opportunities for retailers, global brand owners, business and financial services, creative industries, healthcare and education providers, and niche high value added manufacturers.
Challenges remain for mass market manufacturers (both low-tech and increasingly high-tech), financial services companies not able to penetrate E7 markets who become vulnerable at home to E7 entrants, and companies that over-commit to the E7 without the right local partners and business strategies.
In conclusion, Mr Hawskworth summarized the findings of the PwC report, arguing that the global economic centre of gravity is shifting. The US, China and India are expected to be the three major economies by 2050, and Brazil could be the fourth largest economy in the world by 2050, ahead of Japan. India could grow faster, but China will likely remain much bigger.
China will also face smaller rivals in Asia, like Indonesia and Vietnam. Russia could overtake Germany before 2030 and could become big in the European sphere, and Turkey could also emerge as one of the largest European economies. Finally, Mr Hawksworth concluded that there remain major challenges for the emerging economies to sustain their recent strong growth, and there exist huge opportunities for Western companies in emerging markets, but they are also likely to face great competitive challenges from fast-growing emerging market companies.
Opening Panel: The BRICs
CIBAM Director, Dr Christos Pitelis chaired the opening panel on BRICs. He introduced the first speaker, Mr Stephen King, Group Chief Economist & Global Head of Economics and Asset Allocation Research, HSBC, who spoke about the impact of the BRICs on the West. His talk drew insights from his 2010 book, Losing Control, which explains ‘why the West’s economic prosperity can no longer be taken for granted’ and discusses the emerging threats to Western prosperity.
Mr King began by looking at the significant shift in relative prices. He showed the changes in oil prices between January 2008 and January 2011, observing that overall oil prices are much higher than all oil companies expected 7-8 years ago, and although one might argue that it has to do with the uprisings in the Middle East or other events, Mr King’s data showed that even before those events there was an upward movement, with regular increases in the price of oil. Moreover, metal prices have risen dramatically, and food prices are also a lot higher since 2008. Mr King found the rise of commodity prices puzzling, because normally commodity prices tend to rise at the very end of an economic crisis, whereas this time they have risen in the beginning. He explained that this is due to structural change, the tilt towards the emerging world, associated with rapid growth rates, and resource scarcity driving commodity prices higher.
Mr King then turned his attention to the broader aspect of the story – why emerging nations have done so well. According to the HSBC Group Chief Economist, part of the answer lies in the transformation of ease of movement of capital markets, the flow of information, and political change, which unleashed tremendous growth in the emerging world. He discussed the rate of change in the emerging countries, observing that China is delivering 50 years of US progress every 10 years, and India is achieving 30 years of US progress every 10 years.
He also noted the impact of urbanization, which creates big domestic markets. Rapid urbanization, an infrastructure revolution, and changes in the political and financial landscape support the formation of new trade and capital market connections between countries in Asia and the Southern hemisphere. Mr King emphasized the importance of trade of emerging countries with each other.
In this context, Mr King referred to a recent (June 2011) HSBC report entitled The Southern Silk Road. Turbocharging ‘South-South’ Economic Growth, which argues that we are witnessing the creation of a Southern Silk Road – that is a network of ‘South-South’ trading routes connecting Asia, the Middle East, Africa and Latin America, which will revolutionize the global economy and transform world trade. According to the HSBC report, the volume of trade and capital flows (which are still relatively low) between the emerging world could increase tenfold in the next forty years. The impact of this “turbocharged” trade growth between the emerging nations is expected to be significant, as it becomes increasingly possible for goods designed primarily for a domestic customer base to be sold all over the emerging world. Mr King provided the example of car production, contrasting the smaller cars in the emerging world to larger, heavier American vehicles, suggesting that Chinese or Indian cars will increasingly appeal to and be sold across the emerging world, as they are cheaper, lighter and simpler than their Western counterparts. Furthermore, the increase of South-South capital flows may undermine the US dollar’s reserve currency status and foster the development of major new financial centres, notably in Asia.
In his concluding remarks, Mr King said that the Western world has some serious challenges associated with the factors discussed in the presentation, but the emerging world also faces challenges of how to use their advantages.
The next speaker was Dr Amrita Narlikar, Director of the Centre for Rising Powers, Department of Politics and International Studies, University of Cambridge, who discussed the rise of one of the BRIC countries – India. In her opening remarks, Dr Narlikar referred to the famous quote by Shakespeare that “some are born great, some achieve greatness and some have greatness thrust upon them” and argued that India is not yet a great power, despite the attempts of others to thrust it into greatness. Importantly, she raised the question of whether India will become a responsible great power. To answer it, Dr Narlikar would provide a quick overview of India’s achievements and some reasons for skepticism. She would argue that India is a very powerful ‘veto-player’ but still not a very powerful nation. Concerning the issue of responsibility, Dr Narlikar’s talk would raise questions about India’s willingness to be responsible.
First, Dr Narlikar briefly talked about India as an economic power and observed that although its economy was affected by the crisis, India’s GDP growth rate even at its lowest was a respectable 5.8 per cent. In the context of India’s rapid economic growth, Dr Narlikar concluded that it is therefore not a question whether India wants to be or should be a great power – it is simply becoming one.
India’s huge market potential certainly helps in this respect. India has gained recognition as a leading player and is consistently invited to all multinational table negotiations, and Dr Narlikar pointed out that in such negotiations (for instance at the WTO),
India is not afraid to flex its muscle. However, being included at various negotiation tables does not automatically translate into positive influence.
To examine India’s rise to power, Dr Narlikar suggested applying the concept of ‘vetoplayer’.
She argued that India’s increasing influence in international fora (such as the WTO) can be conceptualized in terms of a de facto ‘veto-player’ status, which can be conferred through strategic or normative mechanisms and can derive from different sources of influence. Dr Narlikar explained that India is now considered economically powerful enough that its lack of support for an agreement can essentially render it meaningless. However, India’s ‘veto-player’ status is not just a product of its economic might, but also has to do with the issue of legitimacy, as an agreement without India can be seen as lacking international legitimacy. Therefore, these various sources of ‘veto-player’ status benefit India’s rising influence on the international arena.
Based on the above Dr Narlikar argued that India is now certainly a major power, but it is still far from being a great power. She explained that there remain major domestic constraints, such as: high levels of corruption (with some saying $450 billion untaxed earnings are sitting in foreign banks), very poor infrastructure, difficulty of doing business (in 2011 India was ranked 134th out of 183 countries for “Ease of Doing Business”), extreme income inequalities, shortages of water, and domestic threats to security. All of these domestic problems arguably impact upon India’s image and credibility abroad, and affect the ways it can assume responsibility.
Next, Dr Narlikar examined how and to what extent India has been able to use its de facto ‘veto-player’ status to achieve outcomes that benefit it. She explained that the public face of Indian diplomacy is an assertion of its belonging to the G20. India has also helped in the creation of powerful South coalitions within the WTO. Dr Narlikar observed that in terms of India’s negotiating tactics, they have sometimes resulted in WTO deadlocks, for which India bears a fair share of the blame. She further discussed India’s historical use of a strict distributive strategy, through which India has acquired a reputation of being a tough negotiator (sometimes described as “Dr No” or “the India that cannot say ‘yes’”), as it is often reluctant to make concessions internationally, a strategy that has had limited success.
Returning to the issue of responsibility, Dr Narlikar talked about India’s low per capita income and developing country status of limited international responsibility. She discussed India’s failure to deliver basic public goods, giving as an example agriculture, which comprises 70% of India’s population and is one of the most inefficient sectors, with poor labour mobility and huge discontent by farmers. In this context, a rising India with more power and prestige abroad is failing the average Indian, and especially its poorest and neediest people. Moreover, as a rising power, India is likely to increasingly be expected to assume global responsibility and take on a leadership role in the provision of international public goods. Whether and how India will try to live up to such expectations remains to be seen.
Next, Mr Michael Calvey, Managing Partner, Baring Vostok Capital Partners, spoke about investment opportunities in Russia. He began his presentation by looking at Russian human capital.
He observed that although Russia does not have the demographic tailwind of Brazil, what we have seen in the last few years (immigration, more births), means that Russia won’t have a growing population but a flat population. He highlighted the importance of education and literacy, emphasizing that the quality of education in Russia is universally strong throughout the country. According to the data he showed, Russia has a very high adult literacy rate (99.4%) and high enrolment (68%) in post-secondary education. Mr Calvey explained that the high quality of human capital enables rapid business scalability, even as companies grow larger and become more complex.
Secondly, Mr Calvey discussed the impact of generational change. He said Russia is “more of a mis-developed country, rather than developing or developed”. In this context, he explained that, fortunately, compared to 10-20 years ago, today’s CEOs are much better trained and have the basic skill set.
Thirdly, Mr Calvey observed that Russia is a natural resources superpower, and its ongoing development of vast natural resources will also drive growth. The diversity of resources it possesses is remarkable: natural gas, oil, coal, nickel, timber, etc., with low production and operating costs compared to most global peers.
Next, Mr Calvey talked about Russia’s balance sheet, explaining that the BRICs are underdeveloped in terms of their balance sheets and that Russia stands out as the least indebted major global economy (it has vastly more savings than debt). He also mentioned that mortgages only started in Russia about five years ago. The low level of existing debt facilitates significant increase in both consumption and investment.
Mr Calvey observed continuing rapid growth in Russia, even after a decade of rapid growth.
He added that while 20 years ago there was no retail sector and no financial services, today we see branded consumer goods and large supermarkets, as well as rapid growth in services. Mr Calvey also argued that Russia is at least as open to foreign investment as the other BRICs, and provided examples of industries in Russia that are led by foreign strategic investors.
Considering political risk, Mr Calvey explained that although Russian leadership is obsessed with preserving power, what matters for business is predictability. In this context, he showed data on Putin’s and Medvedev’s approval ratings, which remain high (in fact, they have higher legitimacy than most Western leaders), as wages steadily increase (since Putin came to power the average wage has increased by seven times). Moreover, as Mr Calvey explained, by comparison with Yeltsin, whose regime was far more corrupt, the current government fares better, and for these reasons Russians do not want a major change in the regime. Mr Calvey pointed out, however, that there have been some high profile cases (for example Shell) of problems doing business in Russia. He argued that these were normally one of two scenarios: either local oligarchs who tried to influence the political situation, or foreign companies that challenged strategic sectors/actors (for instance, Gazprom).
He then provided a company called Yandex as an example of one of the biggest success stories in Russia. Yandex was started by three Russian mathematicians, trained for the oil and gas sector, who started an internet search engine during their evenings. Baring Vostok Capital Partners invested in the company, which grew from zero to $410 million revenues in 2010. Importantly, it did so by consistently out innovating Google, rather than just copying what Google has done. Mr Calvey concluded that there is a bottom up story in Russia with some of the best people with competitive drive creating truly great companies.
The fourth speaker in the opening panel was Dr Jie Wang, Executive Director of the Stanford Center for Sustainable Development and Global Competitiveness, whose presentation was entitled ‘Resources and qualities of knowledge and making better decisions for Chinese enterprise leaders’.
Dr Wang explained at the outset that his talk would deal with China, not from an economic point, but rather with the issue of how Chinese leaders make decisions. He remarked that everybody reads about China’s economic miracles, but the questions he raised pertained to the kinds of knowledge resources the Chinese have, the value systems of Chinese executives, and how to integrate their understanding of the culture.
Dr Wang identified three major knowledge resources for Chinese executives, from traditional Chinese culture and wisdoms: firstly, Confucius (considering the value of society more important than society itself); secondly, Lao Tzu (if you only think about society, you have nothing left for yourself); and thirdly, Zen as a distinct school of Buddhism (deriving personal wisdom from one’s own mind). Dr Wang explained that the predominant knowledge sourcewisdom is Confucius, that is the notion that one should do everything for society (or that one has a duty to society). In addition, Dr Wang discussed the influence of Socialism, still dominant in leaders’ minds, and the impact of modern management theories and thought, as well as the impact of modern science and technologies. He argued that now is the turning point for setting priorities for strategic thinking, in light of globalization and the new challenges, ambiguities and wisdoms it brings.
Moreover, Dr Wang explained that Chinese leaders have doubts about Western management and business theories, and are confused about their quality, as well as the issue of how to integrate current thinking into traditional Chinese thinking and socialism, and how to apply in practice Western management theories to the Chinese social and business settings.
The key question that remains, in Dr Wang’s view, is how to explain to Chinese leaders to integrate and draw on their understanding of their culture, rather than just telling them about GDP rates.
Dr Wang’s talk was followed by a panel discussion, moderated by CIBAM Director Dr Pitelis. Ms Lucy P. Marcus, CEO of Marcus Venture Consulting, raised questions about the challenges of investing in Russia, pertaining to instability and corporate governance, and referred to Hermitage’s problems in Russia and its co-founder-CEO Bill Browder’s crusade against poor corporate governance and abuse of minority shareholder rights at Russian companies. Mr Calvey responded that corporate governance is one thing, corruption is another. The key issue in his mind is corruption, and although in terms of daily life and what happens in state companies there has not been much improvement in the last twenty years, Mr Calvey suggested that in terms of the legal system and one’s ability to protect one’s assets, there has been huge progress in the way the court system works. The nature of the problems faced has also become much more “civilized”. While one used to have problems with the oligarchs, today it is more microlevel problems, except if you try to get involved in politics. Concerning Mr Browder’s case, Mr Calvey added that this specific business model would have had a problem anywhere, not just in Russia.
Mr King commented on the kind of capitalism that is emerging in Russia (state capitalism), and discussed Gazprom’s divide and rule policy for EU companies, its commercial interests and attempts to exert power.
Dr Narlikar faced questions from the audience about the sustainability of the coalitions she mentioned in her talk (not only on the WTO arena, but potential emerging countries coalitions, as they grow and sharpen their interests). Dr Narlikar elaborated on the WTO and Southern coalitions, explaining that developing countries are strong on areas such as agriculture, subsidies, etc., improving their bargaining positions, but it is also difficult for these coalitions to make some concessions. For instance, in India, concessions are difficult to sell politically at the Trade Ministry.
Mr King also answered a question from the audience about development and income inequality in China. He referred to the Kuznets curve, explaining that economic inequality increases over time while a country is developing, and then after a certain average income is attained, inequality begins to decrease. He explained that the high levels of income inequality in China are predicted by this curve, but they should come down in the future. It is also exactly what one saw in Britain in the 1850s and described in novels, such as Oliver Twist. “What we see as income inequality in China is not so unusual in terms of what has happened in other countries”, concluded Mr King. He also remarked that the answer is partly associated with urbanization.
Dr Wang faced a question from Dr Jamie MacIntosh (UCL) in the audience about the surge of patents in China, and whether this is a bureaucratic artifact. Dr Wang responded that Chinese companies lack the real systematic ways of real innovators, no matter how many patents they file.
WPP’s BrandZ Top 50 Most Valuable Brazilian Brands
After lunch, WPP held the European launch of their BrandZ Top 50 Most Valuable Brazilian Brands. Mr David Roth, CEO, EMEA and Asia, The Store – WPP, introduced the session by first explaining what BrandZ stands for.
Created and funded by WPP, BrandZ is the world’s largest consumer brand equity database, with 200,000 interviews conducted each year in 32 countries, in more than 30 categories and more than 6,000 brands. Mr Roth referred to BrandZ as “the bedrock” of how they express consumer and brand thinking, and he pointed to Mr Peter Walshe, Senior Director, Millward Brown, in the audience, who runs BrandZ. Mr Roth talked about the richness of data collected for the past 12-13 years, which helps WPP gain a very good understanding of how brands relate to consumers and what makes them better or poorer.
Using the data from BrandZ, WPP has produced the BrandZ Top 100 Most Valuable Global Brands. WPP distributed a copy of the report to all delegates, and Mr Roth discussed some of the key findings. He observed that the combined value of the top 100 brands has gone up 17% on last year. Comparing the performance of the portfolio of top 100 global brands indexed against the S&P 500, Mr Roth argued that strong brands are a great investment, as the BrandZ portfolio has significantly outperformed the S&P 500. He explained that underneath this, there is an interesting story about how value is transferring, for instance the biggest losers since 2006 have been retail and cars, while technology has grown from 36% in 2006 to 45% of the BrandZ Top 100 in 2011. Moreover, Mr Roth noted that reflecting this value shift is a change in who the number 1 global brand in the world is – Apple, with Google and IBM coming second and third respectively. The remaining brands completing the top 10 are: (4) McDonald’s, (5) Microsoft, (6) Coca Cola, (7) AT&T, (8) Marlboro, (9) China Mobile, and (10) GE.
Mr Roth pointed out that value is moving much more towards the BRIC countries. While in 2006 the BRICs accounted for only 2% of the top 100 global brands, in 2011 19% of the top 100 came from the BRICs (plus Mexico). Three Brazilian brands – Petrobras, Itaú and Bradesco – were among the top 100 global brands. Mr Roth also talked about the many Chinese brands in the top 100 global brands, for instance China Mobile, ICBC, China Construction Bank, Baidu, China Life Insurance, Bank of China, etc. He elaborated on the value shift, showing data on the rate of increase in value of the BRICs (plus Mexico), observing that the BRICs’ growth, especially in the last three years, has been tremendous.
The total value of the top 50 Chinese brands is now US $279 billion. Although “Brand China” is a work in progress, there is evidence of change and its redefinition, shifting from cutting costs to adding value. Mr Roth explained that Chinese brands are gaining credibility, digital Chinese brands are ascending, and brand trust is growing among Chinese consumers.
Chinese brands’ potential is probably best symbolized by the rapid growth of Baidu – China’s largest search engine.
Mr Roth also listed factors that will speed up this progress, such as the fact that OEM work prepared Chinese manufacturers, Chinese suppliers will become innovators, fast learning is a core competence, and size matters. On the other hand, factors that could potentially slow down progress are cultural differences that may hamper growth, safety concerns that hurt brand acceptances, and the fact that Western brands retain their appeal. Mr Roth concluded that he expects that everyone would get to know these brands better in the next few years. He then introduced Mr Eduardo Tomiya, Managing Director, Brand Analytics, for the presentation of the key findings of the Top 50 Most Valuable Brazilian Brands.
Mr Tomiya first discussed the methodology and approach for the Brazilian rankings, launched in May this year. He explained that the model is based on (1) market research, using data from BrandZ, which included 14,800 interviews in 37 categories, analyzing 460 brands, and (2) financial information from Bloomberg on the book value of each brand, as well as market capitalization.
Mr Tomiya defined what they considered to be “a Brazilian brand”, as a brand that is owned by a publicly traded enterprise, and it is either controlled by a Brazilian group or the majority of the operations of the brand is in Brazil.
He then explained that they quantified the market capitalization of each brand and the book value, and that the difference between the two is intangibles. To give one an idea of the importance of managing intangibles, he noted, that the sum of all intangibles from the top 50 Brazilian brands is 55% of total market capitalization. From the intangible value, part is exclusively associated with brands. For example, Mr Tomiya looked at the brand contribution of the main communication providers in Brazil, for some of which (such and NET, a cable TV provider) it is as much as 20%.
Next, Mr Tomiya presented a video with a countdown of the Top 50 Brazilian brands. He announced that the most valuable Brazilian brand is oil and gas giant Petrobras, and runners up are Itaú and Bradesco. Petrobras’s brand value alone is at US $13.4 billion. Importantly, the value of top 50 Brazilian brands has gone up 55% on last year, compared to the 17% combined value increase on last year of the top 100 global brands, noted by Mr Roth.
Moreover, the composition has changed – whereas in 2008 financial institutions represented more than 50% of total brand value, in 2010 this figure is 36%. Looking at the substantial growth of total brand value between 2008-2010 in B2B, retail, and food, beverages and cosmetics, Mr Tomiya concluded that the increase in the importance of brands in Brazil is for all segments.
The last speaker in this session was Ms Sarah King, Managing Director, The Futures Company, who presented on the challenges of progress in developing markets, with a focus on Latin America and the consumer view.
Ms King first gave a brief introduction to The Futures Company, the leading global foresight and futures consultancy, with consultants, researchers and futures experts, who unlock strategies for future success. It is a Kantar company within WPP, with teams in the UK, US, Mexico, Brazil, Argentina, and India, and an established research programme. Ms King then provided some context, observing that there has been an economic shift towards Asia and more recently Latin America. She noted that there is a move towards economic stability and rising middle classes in Latin America, though economic growth and associated optimism about the financial situation (both personal and at the country level) vary across the region. For instance, there are growing anxieties in Mexico and Argentina, but stability in Colombia and optimism in Brazil. However, Ms King explained that there are a number of tensions that can be identified across all countries, between tradition and modernity, local and global, community and individualism, etc. Problems related to these tensions pose potential challenges for progress.
For example, Ms King elaborated on the rise of individualism and the breaking of traditional stereotypes, explaining that over 60% of consumers feel free to “shape their identities and transform themselves in whatever way they want”. Moreover, women are moving into the workforce, and work-life balance is very important, so these transformations are accompanied by new anxieties.
Another important aspect Ms King identified was the issue of authenticity. Staying true to oneself is very important in Latin America, and so is fulfilling one’s potential. There is also a strong focus on self-improvement, although the motivations for this vary across different Latin American countries.
Thus, Ms King observed that as culture and identity evolve, consumers find help to manage and reconcile these new values, roles and aspirations, and branding plays an important role in this process. Branding in Latin America is built on new national identities and sources of pride, and brands are increasingly promoting personal goals, such as programmes for women to fulfill their potential. Companies are trying to reconcile the tension between modernity and tradition, by reinventing tradition and attaching it to new brands, that are specifically modern and distinct.
There are also new anxieties over real and tangible environmental issues.
Environmental concerns in Latin America are exacerbated by the recent devastating floods, earthquakes, etc., and the inability of governments to deal with them. However, people in Latin America are among the most motivated to do something about the environment and to be part of the solution. The problem is that they do not know what they can do, because of lack of resources. Latin American consumers point the finger of blame to companies for causing environmental damage and climate change, and expect companies to be responsible for tackling this damage. In this context, some brands are starting to respond, for example McDonald’s in Argentina, by trying to provide rewards for sustainable energy and water.
Ms King then talked about the consumers of the future in the developing markets. She noted the rise of the emerging resourceful consumer. As emerging consumers have less than their affluent counterparts, they are likely to seek more value for money, functionality, benefits and immediate results, and they are also extremely resourceful consumers, diluting, adding and re-inventing things. They expect their brands to be just as resourceful.
Looking at the Millennial generation in Latin America, Ms King remarked that they are not as different as one might think, sharing common traits with young consumers elsewhere. In Argentina and Mexico they are very price conscious and have fairly negative view of their future, but in Brazil they are enthusiastic about their future and demand material goods while keeping a strong social conscience. Compared to other developing economies, Millennials in Latin America are more open and socially conscious consumers and the defining feature of their generation is the use of technology, but in Latin America this is most closely linked to relationships.
In conclusion, Ms King observed that there are significant variations across the region in terms of economic growth and optimism, but with some key tensions shared in common. The rise of individualism has motivated people to break typical stereotypes, but they are concerned about a loss of tradition. Latin Americans are reconciling old and new through reinvention. They are resourceful and want to make a difference. New anxieties surrounding the environment show people are willing to make a difference, but do not have the capacity to make these changes. Young consumers are more technologically driven than their parents and more socially conscious than their peers in other regions. Finally, companies can fill some of the gaps and help people to express and meet their value aspirations, but varying feelings of risk and uncertainty across the region mean that there is a continued importance for companies to maintain consumer trust.
Panel: Beyond BRICs Mr Aidan Manktelow, Senior Economist & Risk Briefing Manager, Economist Intelligence Unit, chaired the next panel on ‘Beyond BRICs’ and set the scene for the discussion by introducing the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) – “the next big thing in emerging markets”. Mr Manktelow argued that these six countries are likely to deliver sustained high growth into the long term. He explained that the BRIC concept fails to capture all economies that are on the rise. The six non-BRIC emerging markets under the acronym CIVETS are dynamic and fairly diversified, not excessively relying on commodities.
There are obvious variations among them, but all six have relatively large, young populations, accounting for 8.5% of the world’s population.
Mr Manktelow went on to look at the economic fundamentals of the CIVETS, explaining that they look (mostly) solid in terms of recent growth, inflation, current account balance and public debt. Concerning their growth rates in 2009, Mr Manktelow pointed out that with the exception of Turkey, all of the CIVETS were pretty resilient during the financial crisis; Turkey was less so, but rebounded strongly. He also noted that inflation is now higher in Vietnam and Egypt, but attributed this to short-term factors. In terms of current account deficits, Mr Manktelow observed that there are some signs that the Turkish economy is overheating, but argued that it looks good in the long term (so does Vietnam).
Mr Manktelow discussed additional factors, such as political instability risk in the CIVETS, arguing that the political baseline is supportive and that while risks are not absent in the CIVETS, they are also not excessive. Moreover, looking at GDP growth prospects for 2011- 2030, Mr Manktelow claimed that long-term growth rates of the CIVETS compare well with the BRICs and exceed those of the G7 by far.
Mr Manktelow explained that the CIVETS acronym is about picking winners, and other emerging economies with large populations are excluded on various grounds, such as growth potential, security issues (in the case of Pakistan), and high commodity dependence (Nigeria). Other countries, such as South Korea are too rich to be considered part of this group (already being developed economies). Bangladesh, on the other hand, is too poor and will still be a low income country in 2030.
Considering the global impact of the CIVETS, Mr Manktelow submitted that the CIVETS aren’t going to reshape the global order, but argued that they will nevertheless make a significant contribution to global growth, offer major opportunities for investors, bolster their respective regions, and add weight to the shift in global gravity to East and South. He concluded that the CIVETS are the best bet, but joked about his new favourite acronym – the NUTS (Nigeria, Ukraine, Thailand, Saudi Arabia), which are tough to crack.
The next speaker, Ms Anna Stupnystka, Executive Director, Goldman Sachs Asset Management, introduced a different acronym – the “Next Eleven” (N-11), to describe the next big emerging markets beyond the BRICs.
She first explained that the term ‘BRICs’, coined by her colleague at Goldman Sachs Asset Management Jim O’Neill in 2001, was very controversial in the beginning, although now it is less so. The BRICs are already wellknown and considered to be the countries that matter in 2010 and beyond. However, Goldman Sachs Asset Management looked for the next countries with such potential, and identified the so-called “Next Eleven” (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam). Ms Stupnytska first justified why these particular countries are included in the N-11, on the basis of their population size (as well as how large they might become going forward) and their diversity, which is what makes them interesting for investors. She added that it is about the potential at different times and that the probability of realizing this potential also varies among different nations. It is the diversification offered by their many differences that makes the N-11 an interesting group from an investment perspective. Moreover, they have tremendous potential to become large drivers of global growth and consumption.
Comparing the two groups (the BRICs and the N-11), Ms Stupnytska noted that the BRICs as a group were the winner of this decade, and that looking at next 10 years the BRICs could add US$13 trillion to global GDP, while China alone could add 2-3 times more than the US. Moreover, of the top ten contributors to global GDP from 2010 to 2019, no single Eurozone country is in the ranking. From the remaining “emerging” countries, there are no countries that challenge the BRICs but the N-11 could rival the G7 by 2050, with several group members potentially joining the world’s largest economies. Given their contribution, Ms Stupnytska put under question whether it is still appropriate to call these countries “emerging”, and referred to Goldman Sach’s initiative to rebrand these countries as “growth markets” (if a country accounts for at least 1% of global GDP). Their prediction is that in 2050 the BRICs and N-11 will dominate as the largest economies and will see significant rise in income per capita.
Increasing wealth will be accompanied by a shift in consumption patterns. As peak growth in the world middle class is still ahead, and as incomes rise, consumption will become more discretionary. Ms Stupnytska concluded that “we are going through an unprecedented transition” and that the consumption shift will be dramatic. China and India will be the main drivers, but the N-11 consumer could also double over the next 10 years.
Furthermore, Ms Stupnytska elaborated on their model, based on demographics and productivity, and considering growth conditions and factors that could possibly derail growth.
Goldman Sachs have come up with a Growth Environment Score (GES), designed to measure the strength of a country’s sustainable growth, based on different variables, which are the main components of the institutional and policy framework that contribute to growth performance. It takes into account political conditions (political stability, rule of law, corruption), macroeconomic stability (inflation, government deficit, and external debt), macroeconomic conditions (investment rates, openness), human capital (comprising schooling and life expectancy), and technological capabilities (use of PCs, mobiles, internet).
Both the BRICs and the N-11 have witnessed significant improvement in their GES scores from 1997 to 2010, and they have to maintain and improve growth conditions in order to achieve their potential. Ms Stupnytska concluded that there are many complexities related to the “growth markets”, but this makes them exciting and will offer lots of opportunities beyond the BRICs.
The next speaker was Dr Neri Karra, Dean and Director of the School of Fashion and Design London, who provided a more personal perspective on Turkey’s development, role and future, rather than focusing on GDP rates and growth projections.
Dr Karra began her presentation by showing personal photos taken in 1989 at the time of her immigration from Bulgaria to Turkey, and explaining that at the time there was practically no infrastructure – there were no roads, many areas were without water, garbage was not collected, and her school had around 80 students in one classroom.
Looking at Dr Karra’s photos of Istanbul in 1989 compared to today, progress is immediately evident. She claimed that Turkish development is underscored by Turkish people hungry for success. There is a young and dynamic population of 74 million people. Yet until recently people did not know how to achieve their potential, as the infrastructure and the resources were not there (similarly to Ms King’s point earlier in the day about young Latin Americans wanting to make a difference but lacking the capacity to make changes). Dr Karra argued that with Recep Tayyip Erdoğan as Prime Minister this is now changing, and there is a positive ongoing transformation on its way in Turkey, which is supported by good approval ratings for the current government.
In going forward, Dr Karra argued that education is the biggest building block for the future, and that Turkish people value education greatly. Another question for the future remains Turkey’s potential membership in the EU. Dr Karra observed that among Turkish people at the moment there is a mixed answer as to whether they want to be in the EU, but they do want “European-type freedom”, associated with travelling, human rights and better living conditions. She also remarked that compared to some EU states, Turkey already has a higher minimum wage (above €300) than for instance Bulgaria (around €100). She acknowledged that there remain serious challenges for Turkey, particularly with respect to human rights. There are also “road accidents”, such as the banning of YouTube and restriction of some Google services, but the ban was eventually lifted and the PM invited the companies’ managers to talk about moving forward. Dr Karra also addressed another potential challenge for Turkey – the existence of multiple ethnicities. She acknowledged that many skeptics question whether these different ethnicities can live together peacefully, but at least the current government is not trying to hide anything under the rug. Dr Karra concluded that on the basis of the above, she believes there are good reasons to be optimistic about Turkey’s future. This is why over the past few years Turkey has attracted significant inflow of foreign direct investment, not least by Diageo, the Symposium sponsor.
Mr Jago Penrose of the School of Oriental and African Studies, provided a perspective on another emerging country – Vietnam. Over two decades into its reform programme, Vietnam has changed almost beyond recognition. Mr Penrose explained that Vietnam’s growth is based on exploiting unexploited resources, labour and commodities. However, as Vietnam prepares to join the ranks of “middle income” countries, the question is whether continued optimism is justified. Mr Penrose noted that in Vietnam everyone is talking about the “middle income trap”, and analysts are worried that Vietnam is not able to move forward.
Mr Penrose examined FDI trends in Vietnam, explaining that in the 1990s they were predominantly joint ventures with SOEs, in the 2000s Greenfield investments increased, since 2006 there were more M&As and portfolio investment, and since 2007 larger, more sophisticated firms located in improving industrial parks. In terms of key sectors for FDI, manufacturing is the main sector, followed by real estate, hotels and restaurants, mining and quarrying, and transport and communications. Mr Penrose observed that the key question is whether Vietnam is ready to support the next stage of growth, and whether the traditional reasons for the country’s attractiveness to foreign investors still apply.
Next Mr Penrose looked at reasons to invest in Vietnam originally versus reasons to now continue to invest in Vietnam. The young, literate, hard-working labour force was a major advantage. However, wages are rising and there is now a growing skills shortage, a problem that Vietnam is so far failing to solve. Mr Penrose also spoke about the poor quality of tertiary education, riddled with corruption.
Furthermore, Mr Penrose talked about economic instability. He remarked that people are very worried about whether those in power are able to manage the economy. He explained that there are few skilled economists in Vietnam, working mostly in private banks. Key institutions lack capacity, and people are concerned about real estate and stock market bubbles. Moreover, Mr Penrose explained that Vietnam’s fast growth is based on exports, which implies that a foreign company coming to Vietnam would have to import many things.
Yet, Vietnam still has a young, savvy, growing population, and Mr Penrose argued that it remains attractive to foreign investors. Overall, he warned that potential investors should be wary because the private sector in Vietnam is still small and with limited capacity, the state sector remains dominant, there is continuing macroeconomic instability, and the workforce has limited skill levels. However, the business environment and infrastructure are improving, and Mr Penrose concluded that those who tread carefully will be rewarded.
The last speaker in this panel on ‘Beyond BRICs’ was Mr Richard Segal, Head of Emerging Markets Strategy, Jefferies International, who talked about the evolving perception of Africa as an emerging region and potential investment opportunities in both North and Sub-Saharan Africa.
Mr Segal began with a story about being approached in a Nigerian hotel some years ago by a young rapper wanting to distribute his CD. This anecdote, he explained, encapsulates what Africa means to him – young people trying to make something of themselves.
Despite concerns about elusive economic and political reforms after the dust settles from the “Arab Spring”, as well as perceptions that the SSA is overly reliant on commodity exports to finance its growth, Mr Segal argued investment opportunities do exist in both North and Sub-Saharan Africa, no less impressive than they were before the global financial crisis. In fact, even in 2009 the two regions expanded by a composite 2.5%. However, Mr Segal emphasized in his presentation the considerable diversity of countries in the region and also warned about potential pitfalls for investors.
Mr Segal first looked at income levels in Sub-Saharan Africa and North Africa, generally lower in SSA countries, with the exception of Gabon and Angola. He also compared investment propensity, observing a number of peaks both in North and Sub-Saharan Africa.
Comparing debt, Mr Segal noted that SSA is doing a lot better than North Africa. Looking at stock market performance, there is a lot more variation in stock market performance in SSA.
He also showed doing business rankings, generally quite bad for the region, with Ghana doing better in SSA. Moreover, he observed that MENA employment creation has stumbled, and also looked at MENA inflation performance. Furthermore, he examined literacy rates, public health expenditure, and life expectancy and quality of life issues.
Overall, Mr Segal concluded from the data that African growth comfortably exceeds developed economy norms, despite risks and setbacks. He explained that there remain sizable macroeconomic performance differences between even neighboring countries, but North and Sub-Saharan macro indicators are comparable. He also observed that equity markets remain thin, but sovereign risk is generally modest. Finally, the perception of Africa as an emerging market region has evolved as the EBRD’s mandate has broadened to include North Africa.
Following Mr Segal’s presentation, the panelists took questions from the audience and the panel chair, Mr Manktelow.
The closing panel began with a presentation by Mr Andrew Morgan, President of Diageo, Europe, who discussed recent developments in Diageo’s business, and how Diageo’s strategy has changed to skew more to the developing world, reflected in its recent investment in the fast-growing Turkish market.
Mr Morgan first presented Diageo as the world’s leading premium drinks company, with market leading brands across categories. He explained that Diageo truly has a global reach, with its products sold in 180 countries on five continents. The company is committed to the responsible sale and marketing of iconic brands, based on deep consumer understanding.
Diageo is also the leading product innovator in spirits and is very active on sustainability in the context of water. It is building a strong foundation for future performance underpinned by its financial strength.
Mr Morgan explained that Diageo is operating in an uneven world, particularly challenging over the last 12 months. The large developed market business is tough at the moment, and they are not seeing much recovery, with parts of Europe actually getting worse before getting better and a slow US consumer recovery. On the other hand, the performance of developing regions is strong, and at least for Diageo, Russia is back to 20% growth.
Looking to the future, Diageo wants to seize growth opportunities in emerging markets and for their brands to invest disproportionately and reshape the Diageo portfolio. Mr Morgan explained that differentiating across their portfolio is to reflect the uneven world he described.
Moreover, investing in the emerging world is crucial for Diageo, as they predict that emerging middle class consumer spend will triple over the next decade, and 8 markets will drive 75% of spend. They also estimate that EMC consumers will spend more that US$ 210 billion on total beverage alcohol.
In light of the above, Diageo is focusing on 11-12 priority markets. They are acquiring local platforms in each market and partnering with other players, and they have a ‘fit for purpose’ approach to integration, taking into account local circumstances. Mr Morgan explained that there are different ways to integrate businesses, and there are good reasons to have a diversified approach to work practices, etc. This makes for complexity in the organization, but also makes for a faster growing business and bigger opportunities.
Mr Morgan then focused on the Turkish market opportunity, which provides a great example. Turkey has very attractive demographics, with a population of 74 million and progressive urbanization, as well as a high growth market with GDP growth of 8% in 2010. Moreover, Mr Morgan explained that Raki consumption with food is part of Turkish culture. Mey Içki is Turkey’s leading spirits company and the largest Raki producer (with 80% share). They have a broad range of brands across Raki, the most popular spirit, Vodka, the fastest growing spirit, and other categories. They also have superior and comprehensive nationwide distribution network, an established management team, who will remain after the acquisition, and a track record of successful innovation.
Mr Morgan further elaborated on the Raki market. Raki is the most popular spirit and is often seen as a way of maintaining historic traditions. It is traditionally consumed with food and therefore does not compete directly with international brands. Raki is also increasingly appealing to the younger cohort and to women. 10% of Raki is exported, mainly to Germany.
Mr Morgan also gave a brief overview of the vodka market, explaining that vodka is the fastest growing sector with consistent double-digit growth in the Turkish alcohol market, and it is favoured by the younger legal drinking age demographic, especially women. According to brand studies, vodka is perceived as fashionable. Mey Içki is also leader in the Turkish vodka market.
In this context, the rationale for Diageo’s acquisition of Mey Içki becomes clearer. As Mr Morgan explained, the acquisition transforms Diageo’s presence and participation in Turkey – a country with strong market fundamentals. It also brings market leadership in the major local spirits categories (Raki and vodka), gives Diageo an extensive nationwide sales and distribution network, and represents a significant long-term opportunity for Diageo’s premium brands in Turkey that will be accelerated by this platform.
Diageo also considered potential risks, such as government policy towards alcohol (taxation, marketing freedoms, etc.), consumer demand (the role of religion, beer/wine and other available substitutes), and competition. Concerning government policy, Mr Morgan explained that the current Turkish government realizes that the moderate route is the way to go, allowing people to pursue their lifestyles. Moreover, they want to draw in foreign investors, especially in such a sensitive sector. Therefore, Diageo has decided to proceed with the $2.1 billion investment. Mr Morgan concluded that the result of the acquisition was a reshaped Diageo Europe with significantly increased momentum growth.
Mr Alex Sukharevsky, Associate Partner, McKinsey & Company, Moscow, presented on ‘Retail excellence in emerging markets: what it takes’. He began by discussing some common fallacies about emerging markets, namely that the size of the prize does not justify the complexity, and the assumption that the BRIC is ‘one brick’, or that no innovation is needed (that one can just copy and paste). Such fallacies, he claimed, are problematic in the challenging emerging markets.
Next, Mr Sukharevsky observed that emerging markets will represent 50% of the total retail revenue pool by 2020. Within emerging markets, he highlighted the importance of a group of 10 countries: Argentina, Colombia, Indonesia, Mexico, Philippines, Poland, South Africa, South Korea, Thailand, and Turkey. According to McKinsey, these “Next 10” countries after the BRICs will drive significant growth in this decade.
Mr Sukharevsky also looked at the exposure to emerging markets of some leading global consumer goods companies (in terms of emerging markets’ contribution to their total revenue), and he argued that there is plenty of room for growth. He also showed that the fastest growing companies focus more on (and have the biggest share in) emerging markets.
Mr Sukharevsky then explained that it is problematic to think of emerging markets as similar from retail and consumption point of view. He said that Russia is just beginning to discover things that are already second nature in Brazil in terms of, for instance, differentiating the value proposition. He discussed further how challenges and priorities vary by country in emerging markets. Therefore, one cannot apply the same rules and strategies to Russia and China and hope they will work in both contexts. One must also understand reality on the ground and the main challenges of running retail in emerging markets. Mr Sukharevsky provided examples of troubles companies have experienced in emerging markets. These can be related to high overheads, the absence of reliable logistics providers and infrastructure, low supply chain reliability and capabilities to manage them, poor promotion planning and management (as in the Big Bazaar’s Republic Day sale in India), inconsistent behavior of local authorities (who in a case in Russia decided to postpone building a road to the store and connecting it to electric power), or expensive labour due to low productivity and skills (as in an example by Mr Sukharevky of a store in Shanghai, accustomed to highly inefficient, even ‘dangerous’, way of working).
However, despite these challenges and risks, Mr Sukharevsky argued that emerging markets are worth investing in, and there are solutions to overcome the challenges.
Moreover, there are exceptionally creative and ambitious individuals in emerging markets, who are creating new, highly competitive formats and new ways of running business. Finally, Mr Sukharevsky returned to the common fallacies about emerging markets in the beginning of his presentation to dismiss them and offer some pieces of advice to bear in mind. He submitted that with a market size of US $7.5 trillion, the emerging markets are worth the effort. He argued that the strategy for the BRICs should be to “divide and conquer”.
Moreover, people can make or break a campaign. Finally, he concluded, one must follow local innovations and consider exporting them.
The discussion on these and other issues related to emerging markets continued under Chatham House rules, at the suggestion of the panel chair, Ms Lucy P. Marcus, CEO, Marcus Venture Consulting, who moderated a discussion with the speakers and members of the audience. She also informed them that due to a flight delay, the third panelist in this session, Mr John Hulsman, would speak later, at the high table dinner.
Prof. Vicky Pryce CB, Senior Managing Director, FTI Consulting, summarized some of the key points of the day’s presentations and critically assessed the main themes and issues discussed. She raised some concerns about a number of trends. In her view, while there is no doubt about the story of an emerging middle class and a dramatic consumption shift, there are still huge changes that need to take place in emerging countries, and they need structures.
Prof. Pryce also talked about the impact of globalization, questioning whether its benefits are really no longer so visible, and argued against the decoupling hypothesis.
Prof. Pryce commented that although we have heard a lot of positive things about Russia, if the price of oil goes down, Russia would be in a serious situation. She argued that the dangers are still there. It is not clear, for instance, what will happen to income inequality and the social and political tensions it causes, which led to the “Arab Spring”.
Prof. Pryce concluded that “we are in for a lot of hiccups on the way”. In her view, the path ahead will be pretty rough. Another key takeaway point she emphasized was that different countries require different entry strategies and different sensitivities. Finally, Prof. Pryce thanked CIBAM and the sponsor, Diageo, for organizing a great conference with useful insights about the emerging markets, the BRICs and beyond.
The discussion continued at the reception and high table dinner in Murray Edwards College.
At the dinner, Mr John C. Hulsman, President of John C. Hulsman Enterprises, delivered an address on ‘Beyond platitudes: elbowing the BRIC concept out of the way’. He argued that we must discard the BRIC acronym as quickly as possible.
The analysts at Goldman Sachs were surely right to see that the rising BRIC powers constitute a new gamechanging force to be reckoned with on the global stage, but the BRICs have far less in common than the acronym hints at. Mr Hulsman claimed that to understand today’s world, the BRICs must be disaggregated, because their economic and political trajectories are very different. Moreover, the next step is to visualize a region, not just a concept, as the new centre for global economic and political activity. At its heart, he claimed, are India and China, the undoubted stars of the emerging powers.
Mr Hulsman’s address was followed by what has become a CIBAM tradition – a speech by Ms Marianna Vintiadis, Country Manager – Italy & Greece, Kroll, Italy, about the College hosting the high table dinner. She shared various curious facts about the history of Cambridge University and the Symposium venue, Murray Edwards College, in particular. The College was founded as New Hall in 1954 to bring more women to Cambridge.
Its founders adopted the name New Hall, as the College lacked an endowment despite efforts to find a donor. In 2008 New Hall was renamed Murray Edwards College, following a generous donation of £30 million (the largest personal donation to a Cambridge college in the University’s 800 year history) from Ros Edwards, a former student, and her family. Archeological excavations in the nineties have revealed very interesting facts about the history of the area. The all female college is also famous for its permanent collection of modern and contemporary art by women artists.
Next CIBAM Symposium Announcement
Next year’s CIBAM Global Business Symposium will take place on June 28th 2012 at Cambridge Judge Business School on ‘Securing Food and Water’. It will bring together business leaders, academics, policy-makers and representatives of NGOs and international organizations to discuss the challenges presented by the uneven distribution of global resources, the increasing demand for food, and shortages of adequate, safe drinking water.
Leading experts will look for possible ways to tackle the problem of securing food and water. The Vice-Chancellor of the University of Cambridge, Professor Sir Leszek Borysiewicz, proposed the theme of the Symposium, which was endorsed unanimously by the CIBAM Advisory Board on July 8th 2011. Prof. Sir Leszek will give the keynote address. If you are interested to attend or contribute as a speaker, please contact firstname.lastname@example.org. We look forward to seeing you there!
Reportage by Roumiana I. Theunissen