Increasing competition and slowing growth can turn emerging economies such as China, India and Brazil into risky business environments, according to a new Ernst & Young report on globalisation.
Forty-six percent of respondents in E&Y’s latest globalisation survey, “The World Is Bumpy: Globalization and New Strategies for Growth,” believed China’s economy will slow dramatically over the next five years, and 49% agreed that the cost of investing in rapid-growth markets has been much higher than expected. Still, doing business in these markets is critical for their companies to increase revenue and profits, 74% of survey respondents said.
So what’s an executive to do?
“My prescription is that companies must pay careful attention to identifying the differences between these markets and those with which they are more familiar – and figure out strategies for addressing those differences,” Pankaj Ghemawat, professor of global strategy at the Spanish IESE Business School, said in the report.
Emerging and established markets share several key growth risks: About one-third of respondents worried about asset price bubbles, political corruption, income inequality and failure to increase domestic consumption regardless of the market.
But respondents also identified challenges likely to specifically squeeze companies from generating returns on investment in emerging markets.
As companies broaden their reach globally, their supply chains have become more complex. Regulatory and bureaucratic burdens are increasing. And while the US and Europe have a surplus of talent, about one in three employers globally are struggling with talent shortages in developing markets, Jeff Joerres, chief executive of ManpowerGroup, said in the report.
To respond to the new threats and seize on new opportunities, companies “must develop highly nimble operating models,” James S. Turley, chairman and chief executive of E&Y, wrote. “Businesses that try to maintain the status quo risk being left behind.”
Frank Braeken, executive vice president for the Africa region at Unilever, favours regional hubs to balance between global and local and to keep operating costs in check. The Indian telecom firm, Bharti Airtel, has outsourced everything but sales, marketing and finance. And rising transportation costs and currency fluctuations are prompting more and more businesses to bring manufacturing back to local markets, even when that’s a high-cost country like the US.
Meanwhile a new model of leadership is developing, according to the report.
“The rock star CEO is dead,” Beth Brooke, global vice chair of Public Policy at E&Y, said in the report. “Today’s successful leaders understand that they don’t know everything and that they are leading in a world filled with perpetual dilemmas to be navigated.”
—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.
