Atradius publishes study on the promise and perils of emerging markets
09-07-2008
The business prospects in emerging markets are as good as ever. However, China is no longer the undisputed favourite for companies seeking markets abroad. Other countries are growing increasingly attractive as well. 60% of surveyed company representatives continued to give top priority to China over the last three years, followed by India, the next most favoured nation, which was identified by 41% of respondents and South-east Asia, excluding China, by 26%. However, there are signs of a change in the trend as only 48% intend to focus primarily on China in the future. In other words, China remains the top target, but by a far smaller margin. 45% will focus on India in the future, 25% on Central and Eastern Europe, and 24% on South East Asia (excluding China) and Russia.
Experts believe that change is in the cards for China. In the future the country will be more interesting to companies as a growing consumer market than as a cheap manufacturing location. “Some companies have realised that multinationals can achieve success much faster in smaller markets such as Thailand, Vietnam or parts of South and Central America,” says Dr. Peter Ingenlath, Atradius Chief Risk Officer and Vice Chairman. This view is based on findings of the recent international study “Promise or peril – the lure of the emerging markets” produced by Atradius, global leader and provider of credit insurance and collection services.
A recession would also hit emerging markets
“The study findings show that an investor’s choice of country is often driven more by emotion than by sound risk management,” according to Ingenlath. Our study raises the awareness of the special risks in emerging markets and can help companies to be better equipped to deal with them,” explains Ingenlath. Despite the tremendous optimism many companies have about particular countries, the study clearly reveals that “the local risks are underestimated by many companies,” according to Ingenlath. While emerging markets are now better prepared to withstand a slowdown in developed markets and avoid being dragged into a crisis, “they would not be able to shrug off a deeper and longer recession.” In fact, many experts forecast negative economic growth—at least for a number of quarters in succession—as a result of the sub-prime crisis in the USA.
On the one hand 72% of respondents believe their companies will be able to profit from growing opportunities in emerging markets in the next three years. On the other, however, only 30% believe that the risks will lessen over the same period. 69% believe that the level of risk will stay the same or become even more acute. 92% of respondents identified macroeconomic factors and 91% political instability or opaque rules and excessive bureaucracy as significant or very significant obstacles to success. Operatively significant or very significant obstacles identified by experts included poor infrastructure (84%), inadequate training (75%) and credit risks (74%). 55% anticipate sales growth of over 16%
There is a great deal of optimism despite all these risks. This optimism is particularly apparent in the sales which respondents expect to make in emerging markets in the next three years. While 42% of companies reported annual sales growth in excess of 16% in the last three years, as many as 55% of companies expect the same level of growth in the next three years.
90% of companies say that growth opportunities are important or very important when it comes to planning potential activities in these markets. Other important aspects are the ability to serve international customers better (58%) and the ability to avoid increasing competitive pressure in domestic markets (57%).
The trend towards investing in emerging markets remains unchanged. Total capital flows into emerging markets were higher in 2007 than ever before, according to figures from the Institute of International Finance (IIF), at US $782 bn. Of this, US $255 bn came in the form of foreign direct investment (FDI)—an increase of more than 50% compared to 2006. When it comes to market entry strategies, 29% of surveyed companies favour strategic alliances or partnerships while 23% prefer opening a representative office and 14% importing goods.
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