The Next Emerging Markets
from
November/December 2006
by Randy Myers
It’s not news that China and India are
the
emerging markets of the early 21st century, the only countries with more than one billion people each. (The U.S. is a distant third, with 299.4 million.) But where is tomorrow’s hot spot? Which developing country can’t your company afford to ignore, either as a source of economical labor or as a new market for your goods and services?
According to an informal poll of economists and Wall Street market strategists, it’s Russia, which, with 142.9 million citizens, is the world’s eighth-most-populous nation. While intellectual-property rights are weak, corruption pervasive, and the government’s commitment to private enterprise shaky, the country is rich in natural resources, including timber and farmland—which helps explain why Deere & Co. sees it as a great place to sell tractors. The Moline, Illinois, company, which has a Russian website to promote farm equipment in the Cyrillic alphabet, has been doing business there since 2003, when it opened a representative’s office to explore sales and investment opportunities. Last year it started assembling tractors at a plant in Orenburg, about 800 miles southeast of Moscow, and it has set up spare-parts outlets in Moscow and St. Petersburg. According to Russia’s Agriculture Ministry, Deere is also thinking about building a complete tractor plant in the country. “Deere officials have met with various government officials,” a company spokeswoman confirms, “but it would be premature to comment on what might come from these discussions.”
“Russia is the next big emerging market,” Peter Morici, a professor of international business at the University of Maryland, says flatly. “It has size, oil wealth, and technology, and it will get organized to succeed.” No need to argue the point with Dutch brewer Heineken. From a standing start five years ago, it now derives more beer sales from Russia, by volume, than from any other country. Nor does International Business Machines need to be convinced. IBM, whose PC business is now owned by China’s Lenovo Group, began assembling personal computers in what was then the Soviet Union in 1974. Today IBM employs 700 people in Russia, where, according to a company spokesman, its annual revenues have grown at a double-digit pace over the past five years, rolling up a 29% gain in 2005. Their work includes developing software and mainframe technology with Russian business partners. “We can see a lot of growth opportunities throughout the Russian economy, mostly in sectors such as banking, telecommunications, government, and small and medium-size businesses,” says the spokesman.
Even by emerging-market standards, Russia is risky. It’s still hard to predict how friendly the country will prove to foreign investors over the long haul, or to private enterprise in general. In the past couple of years, for example, the government has effectively dismantled the big Russian oil company Yukos and transferred those assets to a state-owned enterprise. The banking and legal systems are weak, and Russia’s heavy dependence on natural resources—80% of exports last year consisted of oil, natural gas, metals, and timber—leaves the economy susceptible to swings in world commodity prices. Still, its recent performance is hard to ignore. Since a financial crisis in 1998, Russia’s economy has grown about 6% annually, including 6.4% in the last year. It is the European Union’s fifth-largest trading partner and the world’s No. 1 supplier of energy after OPEC. It has the 12th-largest economy in the world, and is paying off its international debt ahead of schedule.
Robert Kennedy, executive director of the William Davidson Institute at the University of Michigan business school, also picks Russia as the next big emerging market. “They have a decent institutional infrastructure, fantastic natural resources, and growing linkages to Western Europe,” he says. “Corruption and the business culture are still big problems, but at some point in the next 15 years or so, Russia will have a five-year growth spurt when everything comes together and they have 9% to 10% compounded growth.”
Another potentially powerful emerging market, economists say, is Vietnam. A mere wisp of a place in the eyes of many Americans, Vietnam is in fact the 13th-most-populous country in the world, with 83.5 million people—more than Germany or France. And according to Cleveland venture capitalist Joseph Tzeng, it is eager to join the ranks of the world’s developed nations. Tzeng says his firm, Crystal Ventures, is working on a deal there in which Crystal could invest about $3 million to $5 million over the next three to five years in a company operating in the hospitality industry.
“It is part of our latest effort to invest in lifestyle-related businesses in Asia, such as music, entertainment, and hospitality,” says Tzeng. “We have been traveling throughout Southeast Asia and feel that Vietnam, Thailand, the Philippines, and Malaysia come most close to what Taiwan and South Korea were like 20 or 30 years ago. I truly believe Vietnam will exceed the others. If you go to Hanoi or Ho Chi Minh City, people are eager to work, innovate, make money, drop ideologies, and modify themselves into a modern society. I’m very impressed by the quality of the country’s entrepreneurs and the eagerness of their businessmen and officials to try to make things work the modern way.”
Vietnam expects to attract $6 billion in foreign investment this year, up from $5.8 billion last year. Nike Inc., the shoe maker, sources some of its products there. Chip maker Intel Corp. announced in February that it will build a $300 million semiconductor assembly and test facility in Ho Chi Minh City, its first investment in Vietnam. Should you join them? And if so, what role should your board play? Says David Yoffie, 52, a professor of international business administration at Harvard Business School and a director of three companies, including Intel, where he serves as lead director: “The decision of where and how much to invest in an overseas location is an operational decision, which boards as a general rule should only be responsible for reviewing in terms of whether it is prudent, financially sound, and represents good business judgment on the part of management. Our job, hopefully, is not to tell management where to put plants. If they can’t figure that out, then we have a much bigger problem.”
The Intel board, Yoffie notes, has a lot of expertise in emerging markets. He observes that one director, BP group chief executive Lord Browne, 58, already does business in emerging markets, and another, John Thornton, 52, a professor and director of global leadership at Tsinghua University Beijing, lives in China half the time. Moreover, he says, board member Charlene Barshefsky, 55, senior international law partner at Wilmer Cutler Pickering Hale & Dorr and a former U.S. trade representative, “has negotiated with many emerging-market governments.”
Yoffie adds that when Intel has located plants in foreign markets that caused the board concern, the members have asked management for reviews to ensure that the political risks were considered. For example, he says, when Intel wanted to build a facility in Israel about a dozen years ago, the board “asked management for a full assessment of the political and other risks that might emerge from investing in large fixed assets in a country where violence was always a possibility. After the review, we were satisfied that management had done extensive due diligence, and the investment went forward.” Intel Israel has been a successful venture, credited with developing the low-powered Pentium M processor for notebooks, among other accomplishments.
Intel is looking not only for access to economical labor in Vietnam today but also for the chance to win new customers in that market tomorrow. “The hope is that over the next decade or so, they will become a significant consumer of relevant products, particularly computers,” Yoffie says about Vietnam. “They may not be a very large market today, but the way in which you build a strong brand and presence in a country is to try to get in sufficiently early to develop name recognition and relationships with important ministries, and develop connections with customers, that would potentially help you in the longer term.” He characterizes Vietnam as “a relatively fast-growing economy” with “a growing, educated workforce, which is extremely important for the kinds of investments we’re talking about.”
Many other emerging markets are promising. Economists cite Brazil and Mexico in Latin America, Malaysia and Singapore in Southeast Asia, and Czechoslovakia, Hungary, and Poland in Eastern Europe. But Russia and Vietnam, they suggest, are the two that right now you can’t afford to overlook.
