After writing earlier this week about the bullish views of HSBC on China and Asia as a whole, with the clear view that the world has decoupled, Asia is self-sustaining and China will be the largest economy in the world by 2035 or sooner, I was really interested to hear the views of Damian Glendinning and David Blair.
Damian Glendinning is Vice President & Treasurer with Lenovo, the Chinese PC firm, having previously worked for IBM in NYC, USA. David Blair is Treasurer with Huawei, the Chinese telecoms firm, having previously been treasurer with Nokia in Helsinki, Finland.
In other words, we have two guys in senior jobs at Western firms who have moved East. If anybody can explain the world of China, their outlook and view of the West, it’s these guys.
The main discussion came from Damian’s presentation titled: Asian Multinational Corporations (MNCs) – are they the same or different?, with the point being whether they act like European or American firms, or whether they have their own unique outlook.
Again, not verbatim, but here’s the summary of Damian’s presentation and yes, it’s very useful if you really want to know what’s going on in the world of Asia:
Asian Multinational Corporations (MNCs) – are they the same or different?
First, I think the question is wrong. It’s not Asia we should focus upon, but emerging markets including Russia, Brazil and Latin America.
We’ve seen massive growth in emerging markets for the past decade. For example, according to JPMorgan, GDP growth from 2002 to forecast in 2012, not compounded, is an average 11% growth in China, 8% in India, 7.5% in emerging markets overall. This compares with an average 2.5% across the world, and an average 2% growth in the USA, 1.5% in G7 countries and just 1% in Japan.
As you can see, the country with the lowest growth rate for the last twenty years is an Asian country – Japan – whilst two of the main emerging markets are also in Asia – China and India. So my first comment would be: don’t treat Asia as just some homogenous mass and remember that there are other emerging markets, particularly Brazil, that should be included in this discussion.
The companies which dominate these emerging markets are now not just international firms, but major MNCs:
- the top three banks by market capital are Chinese
- Tata, Mittal are huge Indian conglomerates
- InBev of Brazil is a very large drinks company
Part of the reason for the fast growth of these firms is that their technologies are better. For example, Lenovo are ripping out the IBM IT systems and implementing Lenovo ones. We expect a huge increase in productivity as a result.
Another factor about these companies, is that their home markets are under threat from Western firms who are looking towards emerging markets for growth. These foreign competitors are a major threat, as they can invest significantly to gain market share.
This means that the critical question emerging markets MNCs are asking is that, if you are the market leader in a domestic emerging market, what do you do?
You either expand or you face severe threat from foreign firms and, as the best method of defence is attack, you end up creating aggressive expansion and acquisition plans because you have to. That is a major factor in the reasoning as to why Lenovo acquired IBM’s PC division, why TATA bought Jaguar and Land Rover, why Geely buys Volvo and why Arcelor were bought by Mittal.
Sure, these sound like major expansion plans into overseas markets, but all of these acquisitions are to expand in markets where growth rates aren’t great. These Western brands do not offer growth as they are in mature markets where growth is less than 2%.
If you compare that to the strength of emerging markets, which is based upon growth, then you realise that any acquisition of a western brand is a pure defensive move, not an expansionist one.
I had this realisation when I realised that a decade ago, I lived in New York driving a British car, a Jaguar, and working for an American firm, IBM. I now drive an Indian car, still a Jaguar, and work for a Chinese firm, Lenovo. I suppose the only good news there is that Jaguar, a UK firm, is now being subsidised by Indians rather than by Americans.
So why are these firms buying into mature markets?
What they are buying is brand, access and knowledge of how these markets work.
They then have the challenge of how to make these acquisitions work.
Any firm expanding overseas has challenges, and the challenge here is whether they want to be a true MNC, or an international firm head officed in China or India.
The difference between an international firm and a MNC, is that a MNC has a broad base with diverse senor management whilst an international firm is controlled its from domestic HQ, with key positions occupied by home country nationals and standards imposed by the home country.
The latter are always seen as foreign, whilst the former is far more integrated.
Asian MNCs would historically include examples such as Toyota, Nissan, Hitachi, Sony, Honda and more from Japan; Hyundai, Samsung and LG from Korea; Lenevo, Huawei from China.
This means to be a MNC you have to make acquisitions.
Then you encounter all the other issues, with the biggest challenge being culture. A MNC is different because corporate culture in MNCs is stronger than national cultures. This is why international firms don’t work as well as MNCs.
Another big issue is merging IT platforms, as rarely can a MNC operate on multiple systems, so there has to be an evolution towards a single platform.
A further issue is pride. A Western firm acquired by an Eastern firm has employees who may feel slightly lessened by being owned by Mumbai or Shanghai rather than New York or Frankfurt.
The recent movement in banking is a good example, with high street banks taking over investment banks. Investment bankers have many qualities, but being modest is not one of them, so moving from working for a prestigious Wall Street brand to a common High Street one is not appealing to many of them. This is why so many of these people have moved firms.
Equally, buying an American firm if you come from a low income market, creates challenges develop about pay differentials and attitudes.
So the real issues for an emerging market corporation is where do you go for growth, particularly when developed markets are not growing.
Today, it means that you do look towards other emerging markets, but that creates other risks.
Now risk is interpreted differently based upon your view of the world.
Risk in financial context used to mean that emerging markets firms would look towards working with Western banks, because banks don’t fail, right?
Now, Chinese banks don’t fail, right!
Emerging markets MNCs will therefore say to you today to explain risk management. What are the qualities of risk management that you can give to us in the East, developed in the West? And you complain about our strict regulatory environment, but maybe our regulations aren’t such a bad thing. And with all of your systems and controls, tell us how they work again.
In fact, emerging markets can be less risky because government intervention can prevent overheating in the economy. Remember that the current crisis was purely one seen in developed markets, not in emerging economies.
We actually like our regulations because regulations can prevent excesses. There is no subprime lending in India or China, there’s a lack of derivatives and leverage has been pretty much smothered ever since the financial crisis which occured over here in 1997 to 1998,
Payment disciplines are different too.
For example, Days Sales Outstanding (DSO) for Lenevo in Asia is 15 days. This is because everyone knows payments are a problem, so we offer early payment incentives. In the USA, 30 days is our typical DSO whilst, in Europe, it’s 60 days. So, tell me where the risk lies?
Equally, where are the countries with excessive external debt?
China, Brazil and Russia are down at the bottom of the league table for sovereign debt, because we do not have leverage in emerging markets; whilst, at the other end of the table, the UK, USA, Japan and many European countries are leveraged to the hilt. So tell me, where the risk lies?
In conclusion, we are seeing MNCs coming out of emerging markets, but more because they have to as a defence than that they want to. As a result, they have to grow in developed markets, but the risks and reward are poor and, for many, they would feel more comfortable acquiring and growing in other emerging markets, where there are better opportunities for growth and less issues with regulatory barriers and other hurdles because, as an emerging market firm, they are used to them.
We will see some convergence with traditional MNCs, but we will also see some big differences. For example, emerging market MNCs are far more open than their counterparts, because they are buying in skills and intellectual property to integrate the workforce, not alienate them.
So I can’t tell you what the world will be like tomorrow but I can tell you it’s going to be different, and the future MNC will be much more open and embracing than those of the past.