Published: January 01, 2000
As companies jockey to benefit from the changing dynamics of globalisation, a handful of emerging economies are enjoying an ever-expanding sphere of influence. Brazil, Russia, India, and China — widely referred to as the BRIC countries — now carry significant clout on a global scale. Russia and Brazil can thank their resource-rich good fortune, among other reasons, while China and India have emerged as preferred locations for manufacturing and services outsourcing. All four countries have a burgeoning middle class and a rapidly growing consumer base, particularly India and China where the raw demographic numbers are simply staggering.Together, these four nations, while not formally aligned politically, have emerged as important locations for aspiring businesses in all industries. It may not be long before virtually every company will do business with the BRIC countries, either buying precious resources, outsourcing manufacturing and services, or selling their goods to an increasingly voracious consumer. Naturally, this has enormous ramifications and brings with it many new challenges from a banking perspective.
Since embarking on the path towards a free market economy some three decades ago, China is firmly established as one of the most important cogs in the global economic wheel. Fuelled by modern finance and technology, the ongoing transformation from a state-run economy, and the subsequent speed of industrialisation, has been astonishing.
China’s position as the world’s manufacturer has resulted in unprecedented urban migration and created massive employment, essential for the largest labour force in the world, which in turn is spawning a growing consumer class. Consequently, domestic consumption of goods and services is rising quickly, and with a potential middle class of several hundred million people, the opportunity for multinational companies seeking new opportunities for growth is clear. Until recently, China’s primary appeal to foreign companies was its potential for low-cost manufacturing and cost savings, but increasingly, the greater opportunity is its enormous and largely untapped domestic market for goods and services.
Chinese GDP growth exceeded 11% before the crisis, and even in 2008 and 2009, growth remained at 9% or above. With total 2009 GDP estimated at US$4.9trn, China is now the world’s third largest economy, and second in terms of oil consumption. Increasingly, the fortunes of the commodities market, such as in base metals, are losely linked to the ebb and flow of demand in China. Although projections vary, it is widely believed that China will rapidly become the world’s largest economy.
One factor that has contributed to rapid yet controlled growth in China in recent years is the Chinese government’s ability to implement economic reforms at its own pace in order to protect the interests of its economy and currency. While the speed of reform was modest, it has accelerated in recent years, and in early 2009, the government embarked on an ambitious economic stimulus programme with the launch of massive infrastructure projects, impacting the construction and services industry and commodities markets. This programme was also significant in its objective to reduce China’s reliance on exports to western countries and develop a stronger internal economy.
There are several similarities between China and India, primarily due to the two countries’ scale, such as its huge labour force. Since the 1990s, India has been developing gradually as a free market economy, but not at the same speed as China, which has been one of the factors hindering its growth, with several coalition governments in recent years which have found it difficult to unite various factions to push through reform. Furthermore, the lack of physical and banking infrastructure and prevalence of bureaucracy remains a challenge to doing business. Nevertheless, assisted by a highly educated, English speaking workforce, a commitment to transparent business and accounting practices, and growing investment in technology and communications infrastructure, India has continued to grow strongly at 9% before the crisis and above 7% since 2008.
India has proved a natural location for services outsourcing with a proliferation of call centres, software development and accounting, with over half of its economic output in services and a third of its workforce. As in China, one of the outcomes of urbanisation and the development of high-tech industries is the development of a large consumer class with increasing buying power. India is a country with considerable potential that would be disastrous for companies to ignore, even though it is taking longer to reach fruition than China. For example, in GDP terms1, India’s economy is larger today than that of every individual European country.[[[PAGE]]]
The potential for growth is not exclusive to the major economies in Asia. Brazil has seen significant change over the past 10 years, and has emerged strongly as a powerful economic force. There are various factors fuelling the country’s growth. With its huge reserves of natural resources, investors have greater confidence in Brazil’s ability to sustain growth levels than other countries that lack this natural ‘collateral’. Although demand for commodities may vary from year to year, and inevitably Brazil was hitby commodities volatility in 2008-9, consumption is not reducing in developed economies and continues to grow strongly in emerging economies, so it seems highly probable that commodities will become increasingly valuable.
Brazil has seen significant change over the past 10 years, and has emerged strongly as a powerful eocnomic force.
Brazil recently reported some of the world’s most significant oil finds, making the country not only self-sufficient in terms of energy consumption but a large net exporter as well. Brazil is also a major provider of agricultural products, such as coffee, sugar, soybeans, corn, orange juice and beef. In addition to Brazil’s strength in commodity terms, it has a burgeoning services industry, equivalent to over 60% of output and labour force.
Financially, the Brazilian real has been relatively stable compared with other currencies, and the country’s sovereign debt rating has been increased to investment grade status. For investors and businesses seeking to source or supply goods, the country brings both potential and stability. Like China and India, Brazil has the benefit of a huge population with increasing incomes, resulting in a demand for consumer goods, electronics and cars. Also like these countries, Brazil has the opportunity to continue developing a strong internal economy without excessive reliance on exports.
Hosting the 2014 World Cup and the 2016 Olympics will provide additional medium-term stimulus in terms of infrastructure and industries such as tourism etc., but just as importantly, these events should help to spur economic and consumer confidence.
The fourth BRIC, and perhaps the most enigmatic, is Russia. Since the fall of the Soviet Union, Russia has been on a roller-coaster ride in adopting, and sometimes eschewing, free market principles. Since then, the country has experienced tremendous boom and bust cycles fuelled by its heavy reliance on the export of natural resources, particularly gas, oil and base metals.
The perception of Russia and the reality often differ significantly. Russia is still hampered by cold war notoriety, with fears over security, property seizure, fraud and corruption. In some cases, these concerns have some justification, and there needs to be greater transparency of business reporting and culture. However, despite the challenges of bureaucracy and lack of infrastructure to support financial processes, there have been significant advances in economic maturity. Not only is Russia a huge country with significant consumer potential, but it has built up considerable expertise in areas such as service delivery and specialist manufacturing, engineering and technology research and development, leveraging a tradition of educational excellence. These specialist skills in addition to its wealth of natural resources and a growing consumer market, have elevated Russia to an extraordinarily powerful economic position.
With market saturation in many existing markets, it is not difficult to see why the BRIC countries, and other newer economies such as South Korea, Indonesia, Turkey and Middle Eastern states, now represent some of the most exciting growth opportunities for companies of all sizes. But with unusual opportunity comes a similar measure of risk. For example, navigating the regulations and bureaucracy of establishing subsidiary operations in unfamiliar countries can be a major factor in success or failure. Treasurers have a major role to play in the success of their companies in new territories, and increasingly need to be closely engaged in the financial logistics of establishing or expanding business operations.
For companies with US- or European-based treasury headquarters, managing liquidity is often cited as both a major priority and a significant challenge. While each company will have specific objectives, there needs to be balance between maintaining cash in-country to fund local operations and growth versus repatriating cash to meet the needs of the company as a whole. This issue became particularly apparent during the recent financial crisis when working capital was at a premium, particularly in countries such as China and Brazil where it may be more difficult to transfer money cross-border.
It is not hard to see why the BRIC countries now represent some of the most exciting growth opportunities — a must location — for both middle market companies and multinational corporations. But with uncommon opportunities come commensurate risks, many of which are the result of establishing subsidiary operations in foreign countries with unfamiliar and frequently changing rules and regulations. The responsibility to address many of these challenges falls under the purview of the modern-day treasurer, who must take into account the financial logistics of establishing or expanding operations in the BRICs. No matter how brilliant a corporate strategy, its success may ultimately hinge on the ability to execute in these challenging markets.[[[PAGE]]]
From the perspective of international trade no company can ignore the opportunities that these countries present for both sourcing and sales.
For companies operating in Brazil, compliance with regulatory requirements is a considerable challenge, which often hinders efforts to enhance efficiency and dedicate resources to added-value tasks. Furthermore, currency volatility has created additional risk and made forecasting more difficult. This is the experience of companies operating not only in countries such as Brazil, but also in Russia where the currency is heavily influenced by world oil prices and the relative strength or weakness of the USD. In Brazil, the central bank has taken steps to relax foreign exchange rules in recent years, enabling companies operating in Latin America to manage their currency risk more effectively, such as using multicurrency accounts.
Companies that are accustomed to operating in mature markets sometimes overlook seemingly minor details that can have major ramifications when doing business in less familiar territories. India, for example, is still a paper-dominated society with a reliance on cash and cheques, although more sophisticated electronic payment methods are emerging. However, with limitations in the domestic postal service, companies need to balance the need to respect local payment conventions with reliability, efficiency and security objectives. Consequently, treasurers and finance managers can benefit significantly by working with a bank that can provide solutions that satisfy operational efficiency, liquidity and risk management objectives in a local context.
There are numerous other situations where the right local advice can be invaluable. In Russia and China, for example, there have been cases whereby certain high-value contracts for services have been signed, but cancelled retrospectively because the person signing on behalf of the local entity did not have the relevant authority. Enforcement of contract terms, local versus international accounting requirements and registering of transactions with the relevant authorities all merit caution, and once again, the support of a trusted banking adviser can be crucial in avoiding financial or reputational damage.
We regularly see references to the ‘global financial crisis’ of recent years, but in many ways this is a misnomer. Certainly, the economies of North America and Europe have been in crisis. Others in Asia and Latin America, such as Mexico, have also suffered where they are heavily reliant on western markets. Although we have seen a deceleration in growth in Asia and Latin America, many countries in these regions have not been in crisis, and certain countries have been strengthened considerably during the crisis in comparison to their western peers. Brazil, Russia, India and China are widely referred to as the ‘BRIC’ countries, but this description does not reflect the vast differences between them in geographic, cultural, economic, political and regulatory terms. While all four have a growing middle class and rapidly growing consumer base, creating large domestic markets, there are few similarities beyond this.
Although we are likely to see their ranking on the world stage continuing to improve, China is currently the second largest economy in the world [2] after the United States and the second largest exporter. Brazil (9th) Russia (7th) and India (4th) are also formidable forces in the world economy.[3] From the perspective of international trade, therefore, no company can ignore the opportunities that these countries present for both sourcing and sales. Furthermore, with China recently surpassing the United States as Brazil’s largest trading partner, companies headquartered in North America should expect to see growing competition from Latin American and Asian businesses.
1. Purchasing power parity
2. All statistics from Central Intelligence Agency World Factbook, September 2010, Size of economy refers to GDP (purchasing power parity).
3. Ofiicial statistics place Brazil 10th, Russia 8th, etc. in the world rankings but this is due to the European Union being considered the world's largest economy. If European countries are listed individually, the United States is the world's largest economy, followed by China.
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