June 21 2016

Tomorrow’s Global BusinessPart Two: Emerging Economies

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Catching upis hard to doInsideAnimble cohort ofmultinational companies from the developingworld is gaining ground

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2 | FTReports FINANCIAL TIMES Tuesday 21 June 2016 FINANCIAL TIMES Tuesday 21 June 2016 FTReports | 3

Tomorrow’s Global Business Emerging Economies Tomorrow’s Global Business Emerging Economies

C atching up can be hard todo. But while manyemerging market econo-mies have hit the skids inthe past couple of years,

an aggressive cohort of multinationalcompanies from developing coun-trieshascontinuedtorisesteadily.

Emerging market companies areusing a medley of strengths — includ-ing significant cost advantages, adeeper understanding of regionalmarkets and robust relationshipswith stakeholders, governments andcustomers — to grow by winning mar-ket share from established US andEuropeanmultinationals.

BCG, a management consultancy,estimates that the number of compa-nies in Asia with more than $1bn inannual revenues jumped sixfoldbetween 2003 and 2013 to a total of1,015. Many of these companies areemerging multinationals or haveambitions to expand overseas — andalmost all of them compete withestablished multinationals in theirhome markets. In Latin America,Africa and the Middle East the pace ofcorporate growth is slower but stillimpressive, BCG data show. Therewere about 700 corporations in theseregions with annual revenues inexcess of $1bn in 2013, double thenumberseenadecadeearlier.

The recent slowdown in headlineGDP growth in several emerging mar-kets — notably recession-hit Russia,Brazil, and South Africa — hasaffected the growth rates of manycorporate challengers from the devel-oping world, says ChristophNettesheim, senior partner at BCG inSingapore. “Nevertheless, I would saythat emerging market companies arestill winning market share from mul-tinationals overall, despite the slow-down that we have seen in the lastcoupleofyears,”MrNettesheimsays.

In addition, longer term structuraltrends may be helpful to emergingmultinationals. The urban popula-tion of developing countries is set togrow by 600m by 2020, a year bywhich some 6.4bn people out of a glo-bal population of 7.5bn are expectedto live inemergingeconomies.

In this report, FT correspondentsin Asia, Latin America and Europeprofile companies that are makingregional or global waves, illustratingshifts in the competitive landscapewhether in vehicles, renewableenergy, construction, luxury goods orfoodanddrink.

Chinese companies loom largeacross several sectors. In some cases,such as the expansion of Chineseautomakers into the Brazilian mar-ket, an internationalising verve is

Challengersgain grounddespiteslowdown

Companies fromdeveloping countries arewinningmarket share, writes James Kynge

Grupo Bimbo of Mexico, Latin Amer-ica’s second-largest food company interms of revenue, is one of a club ofemerging market food companiesthat are diversifying into developedmarkets in search of upmarketbrandstoswallow.

Bringing in some $13.7bn in reve-nue(about219bnpesos) fromsalesofslicedbreadandcarb-fuelledtreats in2015, Grupo Bimbo is a sizeable pres-ence even compared to its moreestablished Anglo-Saxon peers, suchas Premier Foods in the UK and US-basedGeneralMills.

In fact, the Mexican baker’s reve-nues are 12 times those of Premierand General Mills — at $1.1bn and$1.2bnrespectively in2015.

Food companies tend to be the fast-est-growing of the corporate giants inemerging markets and Grupo Bimbohas plenty of international counter-parts. Brasil Foods (BRF) and JBS ofBrazil are conglomerates whose mainbusiness is processed meat, with BRFspecialising in halal-certified cuts.Thailand’s Charoen Pokphandfocuses on fish and poultry. Indofoodof Indonesia is famed for its instantnoodles, while Turkey’s Yildiz Hold-ing owns McVitie’s biscuits, GodivachocolatesandJacob’scrackers.

These five food companies — fourof them listed, while the privately-held Yildiz controls publicly tradedcompanies — between them gener-ated about $79bn in annual revenuesduring 2015, four times more than USheavyweight Kraft Heinz (with$18.3bn).

Their competitive advantage is thelow cost of production at home com-bined with an extensive distributionnetwork. But they have compoundedthese benefits by snapping up brandsabroad. Back in 1945, Grupo Bimbo’sbaked goods were delivered to cornershops in Mexico City by five trucks. In2015, the group serviced 2m points ofsaleacross22countries.

Cheaper lines of credit available toemerging markets corporates overthe past decade have facilitated thisvoraciousspendingspree.

Grupo Bimbo has added 40 brandsto its portfolio in the past 10 years,while BRF has acquired 13 additionalbusinesses in the past two. The aver-age interest rate on cash borrowed tosecure Grupo Bimbo’s acquisitions,4.4percent, ishistorically low.

“Bimbo has a very good record ofbalancing their level of debt, gradu-ally paying off their loans before bor-rowing to buy something new,” saysRogelio González, part of the Mexicocorporate ratings team at Fitch, theratingagency.

However, these companies are notimmune to rising levels of debt inemerging markets and the fallingpriceofcommodities.

In Brazil, for example, record-highcorn prices in 2016 are forcing poul-try processors to close plants andmaking pork producers slaughteranimals they cannot afford to feed.BRF, the world’s largest poultryexporter, and beef exporter JBSraised local prices for the second timethisyeartotrytocontainfeedcosts.

“The price of drumsticks in thesupermarket is 5 reals [$1.40] a kilo-gramme: that barely pays for water toproduce the meat,” Mario Lanznas-ter, president of Aurora Alimentos,Brazil’s third-largest pork and poul-tryprocessor, told localpress in June.

What sets Grupo Bimbo apartand maintains its investment grade

status, according to Filipe Alves daSilva, senior Latam adviser at Indo-suez, a Switzerland-based wealthmanager, is that 53 per cent of its totalrevenuesderive fromitsNorthAmer-ican operations. “They sell bread indollars and buy ingredients in dol-lars . . . so their growth margins havebeenremarkablystable,”hesays.

Grupo Bimbo runs 89 productionplants north of the US border. Recentadditions to the group’s portfolioinclude Canada Bread and Sara Lee’sNorth American bakery business.Shouldthedealgothrough, inthesec-ond half of 2016, Panrico in Spain andPortugalwillbeafurtheracquisition.

Thanks to diversification, only 35per cent of Grupo Bimbo’s total reve-nue comes from Mexico, where thecurrency has fallen about 6.5 per centagainst thedollar since thestartof theyear, making the Mexican peso theworst performing emerging marketcurrency against the dollar in 2016.Revenues at Grupo Bimbo in the firstquarterof2016rose13.2percentoverthe same period last year to 56.64bnpesos,abovemarketexpectations.

For Yildiz, buoyant sales from itsconfectionery segment (of about$4.5bn last year) have led to plans toconsolidate its confectionery opera-tions into a new UK-based companytobenamedPladis,by2020.

Food brands huntfor their next mealConsumers

Companies fromdeveloping nations seekprestige names to swallow,reports Lucinda Elliot

represented by mostly private com-panies that have survived a cauldronof competition at home and are nowattempting to build their brands inforeignclimes.

But Brazil also shows how foreignheadwinds can stunt emerging ambi-tions. The arrival of these Chinesecompanies in the world’s fourth-larg-est car market preceded a meltdownin Latin America’s biggest economyby just a few years, forcing the auto-makers to offer deep discounts andhampering nascent sales growth. Inspite of the turbulence, some marketshare has been won, but some plansto localise production in Brazil havebeen put on hold because of modestsalesvolumes(seepage8).

In other sectors, the power of theChinese state reinforces overseas for-ays. Infrastructureconstructioncom-panies and construction equipmentcompanies have been riding on thecoattails of finance provided by twohuge state-owned development or“policy” banks — the China Develop-ment Bank and the Export-ImportBank of China. These now lendalmost as much as the six western-backed multilateral developmentinstitutionsput together.

At the end of 2014, the two Chinesestate-owned development bankshad outstanding loans to overseas

borrowers amounting to an esti-mated $684bn, just short of the$700bn owed to the World Bank,Asian Development Bank, Inter-American Development Bank, Afri-can Development Bank, EuropeanInvestment Bank and the EuropeanBank for Reconstruction and Devel-opment, according to a study by Bos-ton University and the Chinese Acad-emyofSocialSciences.

Most of the Chinese developmentfinance is for infrastructure projects,preparing the ground for large home-grown companies to win constructioncontracts.

These contractors, in turn, tend toprefer Chinese construction-equip-ment companies, such as Sany andZoomlion,assuppliers.

T he financial firepower ofChinese developmentinstitutions is unlikely todissipate as Beijing rollsout its “One Belt, One

Road” initiative, a grand design tobuild infrastructure in more than 60countries between China and Europerequiring an estimated investment ofabout$900bnoverthenextdecade.

But China is by no means the onlyspringboard for emerging multina-tionals. Jollibee Foods, the Philippineowner of fast-food brands worldwide,

‘The number of Asiancompanies withmorethan $1bn in annualrevenues jumped sixfoldbetween 2003 and 2013’

shows that a successful multinationalcan emerge from almost anywhere inthe developing world, given a stronghome base and judicious internation-alisationstrategy.

Not only has Jollibee built up achain of noodle restaurants in Chinaunder the Yonghe Dawang brand, ithas taken on the US burger marketwith the recent acquisition of a 40 percent stake in Smashburger, which iscontributing to its healthy growth intheNorthAmericanmarket.

The experience of Indian businessconsultancy multinationals such asTata Consultancy Services, Infosysand Wipro, however, shows thateffective international strategies thathave worked in the past may needupdating(seepage10).

Clients who once had healthy appe-tites for outsourcing are now auto-mating these processes in-house,putting pressure on the Indian com-panies to offer innovative and bettervalue-added services that cannot beaccomplished by that mass hiring oflow-paidIndiangraduates.

As a result, and to stay relevant toclients in a changing world, theseformer trailblazers for fast-growingemerging multinationals more than adecade ago, must rethink their strate-gies to offer more creative productsandservices.

New frontiers: employees ofJollibee Foods in Quezon City,the PhilippinesVeejay Villafranca/Bloomberg

InsideWindfarms power upThe world’s largestturbine manufacturer

faces asaturatedmarket athome inChinaPage 6

Carmakers’ Brazilexpansion stallsChinese companiespostpone plans toopen new factoriesPage 8

Asian luxury brandslook to the westTourists combineholidays to the USand Europe withshopping spreesPage 9

India’s tech serviceschange tackThe high-staff-countmodel is under threatfrom automationPage 10

40Brands GrupoBimbo hasacquired inpast 10 years

13Brands BrasilFoods hasacquired in thepast two years

ContributorsJames KyngeEmerging markets editorLucinda ElliottFT contributorGavin BowringResearch director, Asean,FT Confidential ResearchChristian ShepherdResearcherLucy HornbyDeputy bureau chief, BeijingJoe LeahyBrazil bureau chiefJennifer ThompsonReporter, Hong KongDavid KeohaneFT Alphaville, India correspondentSteven BirdDesignerAlan KnoxPicture editorCordelia JenkinsCommissioning editor

All editorial content in this reportis produced by the FT. Ouradvertisers have no influence overor prior sight of the articles.All FT Reports are available at:ft.com/reports

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4 | FTReports FINANCIAL TIMES Tuesday 21 June 2016

Tomorrow’s Global Business Emerging Economies

N ot long after Starbucksmade its first foray intoHo Chi Minh City in2013, a local coffee chaincalled Phuc Long pre-

sented a direct challenge to the inter-nationalbrand.

Starbucks set up shop on a mainintersection of Ly Tu Trong street inthe city’s District 1. Phuc Long’s storeopened a few paces away. Its logo wassimilarly green and white, its interi-ors were comparably pristine andmodern and it offered its customers aconsiderable discount on the price ofa Starbucks cappuccino. Since then,the Vietnamese chain has sought toattract other would-be Starbucks’ cli-ents, opening in large office buildingsandshoppingcentresacross thecity.

The incumbent does not seem wor-ried. “While the food and beveragespacehasbecomeverycompetitive inVietnam, Starbucks has a total of 20stores across Ho Chi Minh City and Hanoi that are doing well,” says AlainCany, country chairman for HongKong-based Jardine Matheson, theowner of the Starbucks franchise.“We plan to have 30 nationwide bytheendof theyear.”

Despite competition from localchains, Starbucks is perceived as apremium brand among Vietnam’supper-middle classes. While Ho ChiMinh’s café scene is already one ofAsia’s most diverse, with an abun-dance of independent cafés anddomestic chains serving sophisti-cated varieties of fresh roasted cof-fees, there is potential for moregrowth.

A quarterly survey by FT Confiden-tial Research of 1,000 consumers ineach of the five biggest economies inthe Association of Southeast AsianNations (excluding Singapore) in2015foundthatVietnamwastheonlycountry where Starbucks was notranked as the most frequently visitedchain thanks to prevalence ofhomegrownfavouritesTrungNguyênand Highlands Coffee. FTCR gaugespopular sentiment towardsmacroeconomicandpolitical trends.

While the regional dominance ofStarbucks and other internationalcoffee chains has been well estab-lished, a surge in the establishment ofindependent cafés across SoutheastAsia’s capital cities presents a long-term challenge to the bigger and bet-ter-knownbrands.

Jakarta, Indonesia’s capital, is anotable example, where per capita

coffee consumption is growing atabout 5 per cent annually, althoughthis remains below many countries inAsean and East Asia according to theLondon-based International CoffeeOrganization.

Indonesian chains such as CoffeeToffee, Ngopi Doeloe and AnomaliCoffee are multiplying, and the inde-pendent café and organic coffee con-cept has also developed strong roots.Similar trends are being seen in KualaLumpur, Manila, and Bangkok,accordingtoFTConfidential surveys.

Independent chains are also suc-cessfully expanding in Asean’s fron-tier markets, including Dao CoffeeShop in Laos, Brown Coffee in Cam-bodia, and Coffee Circles and Espres-sonite inYangon,Myanmar.

While the size of the urban middleclasses in these countries remainscomparatively small, Starbucks,Costa Coffee, and The Coffee Bean &Tea Leaf have all made recent initialforays into Phnom Penh, whileregional chains such as Thailand’sBlack Canyon are expanding in bothCambodiaandMyanmar.

Local chains take on coffee giantsRetail Southeast Asia’scaffeine hit could bebad news for largergroups, writesGavin Bowring

Indonesia and Vietnam hold the greatest long-termpotential for growth for many consumer industriestargeting Southeast Asia thanks to favourabledemographics and high per-capita consumption levels.

But the Philippines is still the region’s most dynamicgrowth market for the fast-food sector, partly becauseof the established dominance of local chains owned byJollibee Foods and smaller groups like Max’sRestaurant. No other states in the Association ofSoutheast Asian Nations have homegrown fast-foodchains of similar scale.

Fast-food culture has taken hold in the Philippinesbecause of rapid urbanisation, cultural affinities withthe US and the rise in many cities of outsourcingindustries where staff work all night.

But there are indications that the scope for domesticgrowth for Jollibee has begun to plateau. FTConfidential Research, an analysis company in the FTgroup, conducted surveys of 1,000 consumers between2013-15 that found the preference for Jollibee haddeclined slightly, albeit from a high base.

There are signs of growing competition, too, from thelikes of McDonald’s, whose franchise holder, GoldenArches Development, is planning 30-40 new

restaurants this year, bringing the nationwide total tomore than 500. McDonald’s has been successful intapping parts of the sector at Jollibee’s expense,notably the breakfast market.

Also there is new competition, according to FelipeSalvosa, Philippines researcher at FT Confidential. First,the push by domestic food and beverage groups suchas Bistro Group, which is launching casual dining outletsacross Manila, including local franchises for Americanchains TGI Fridays and, potentially, Texas Roadhouseand Denny’s. Then there is the growing popularity ofrestaurants such as Vikings Luxury Buffet, anincreasingly ubiquitous feature of Filipino shoppingcentres that offer package deals on food and alcohol.Convenience chains such as FamilyMart, Lawson,Ministop and 7-Eleven have also expanded into cookedfood. These chains now compete directly for the customof the growing ranks of night-owl workers.

In response, Jollibee has sought to expand overseas,targeting the Filipino diaspora. It has paid $100m for a40 per cent stake in US-based Smashburger. Jollibeehas established footholds in the US, China, and otherparts of Asia and the Middle East.GB

Philippines Fast food flourishes

Cafe culture: customers at the Jek Piek coffee shop in Hua Hin, Thailand—Leisa Tyler/LightRocket/Getty Images

Southeast Asia’s most visited coffee chainsQuarterly survey of 1,000 consumers in each country* (Q4, 2015)

Source: FT Confidential Research * Respondents may choose more than one option

StarbucksMcCafe (McDonald’s)Coffee WorldThe Coffee BeanDunkin’ DonutsOtherDoes not regularly visit

32%11%

7%4%4%

25%37%

Thailand

StarbucksDunkin’ DonutsMcCafe (McDonald’s)The Coffee BeanBo’s CoffeeOtherDoes not regularly visit

45%17%14%11%10%

5%25%

Philippines

StarbucksSeattle’s Best CoffeeMcCafe (McDonald’s)The Coffee BeanDunkin’ DonutsOtherDoes not regularly visit

38%20%19%17%

4%9%

30%

Malaysia

StarbucksJ.CO Donuts & CoffeeDunkin’ DonutsThe Coffee BeanKopitiamOtherDoes not regularly visit

32%30%13%10%10%15%22%

Indonesia

Trung NguyenHighlands Coffee The Coffee BeanStarbucksMcCafe (McDonald’s)OtherDoes not regularly visit

49%26%

7%6%3%

14%22%

Vietnam

6 | FTReports FINANCIAL TIMES Tuesday 21 June 2016

Tomorrow’s Global Business Emerging Economies

D abanchengwindfarm’slocation inanaturalwindtunnel inChina’sXinjiangprovincemakesitoneof thebestsituated

intheworld. It isalsoashowcase fortheturbinemanufacturerGoldwind,whichbecamethe largestsupplier intheworldafter installingsomuchturbinecapacity in2015that itovertookVestasofDenmark.

WuGang,Goldwind’s founderandchairman,sweepshishandsgracefully toshowhowthewindcourses throughthenarrowcorridorbetweentheJunggarbasinandtheTaklamakandesert,whereMarcoPolowroteofhearingthevoiceofageniecalling fromthewhirlwinds.

Todaymorethan300towersrisefromthedustydesert floor,churnedbythatconstantwind.Dabancheng isanengineer’sheaven,studdedwithprototypesofnearlyeverygenerationof turbinetechnology,bothChinese-madeandforeign.“I jokewhenI’minEurope—ItellyoungpeoplewhowanttoknowthehistoryofEuropeanwindpowertechnologytocometoDabancheng,”MrWusays.

Whetherornot thoseyoung

enthusiastsmakethetrip,Goldwindiscomingtothem.Lastyear,Chinaaccountedforhalf theworld’swindpower installation. Itnowhasathirdof theworld’s totalwindpowergenerationcapacity.

Goldwindisnot theonlycompanyontherise: fiveof thetop10windturbinemanufacturersareChineseaccordingtoFTIConsulting,abusinessadvisoryfirm.Manycuttheir teeth inaprotectedmarket,after local ruleseffectively lockedmanyforeignturbinemanufacturersoutof theChinesemarket.SaturationinthedomesticmarketnowmeansthatGoldwindandits fellowChineseproducersare lookingtocompeteoverseas.Pressure fromChineseexports isalreadyfuellingaroundofconsolidationamongestablishedEuropeanplayers.SiemensofGermany, forexample, is intalks tobuySpanishturbinemakerGamesa.

AthomeinXinjiangprovince,Goldwind’shomemarket,windpowercapacitydoubled in2015,reaching26percentof theregion’stotalpowergenerationcapacity.However,abottleneckintransmission linesoutof theregionmeansthatalmosthalf its installedwindpowerwentunusedinthefirstquarterof2016.

“Xinjiang isprettymuchmaxedout intermsof installedwindcapacity,”saysSebastianMeyer,researchdirector for renewableenergyconsultancyAzureInternational.

Tomaintain itspositionastheworld’s largestwindturbinesupplierGoldwindwillhaveto increasesalesinotherChineseprovinces,notoriousfor their localprotectionism,where itwillalsohavetocompetedirectlywith itsdomesticrivalsGuodian,MingYangandCSIC.Meanwhilecurtailment—theamountofinstalledwindpowercapacitynotbeingusedbythegrid—isrising,asprovincesracetomeetBeijing’srenewableenergytargets.

MrWuremembersthe1980sas aneraof internationalwindpowerco-operation.Hebecamefascinatedbythepotential forwindpowerwhileworkingonanexperimentalprojectinXinjiangfundedbytheDutchgovernment.Thatexperimental farmisnowDabancheng.

Heisquicktopointout thatbeingbig inChinadoesnotnecessarilytranslate intostrengthoverseas.“Wearenumberone intheworld intermsofmarketshare,butwearewellawarethatwestill lagbehindmultinationals likeSiemens,GEandVestas,”hesays.

“TakeVestas.Theirproductsaresold inmorethan30countries.Oursareonlysold in17countries.This isagap.AsaChinesecompany,welag farbehindourforeigncompetitors ininternationalisation.”

ButGoldwindiscatchingup. Ithires local salesandinstallationteamsoverseasandalso financeswindfarmstosell topowerproducersafter theyareupandrunning.

Listed inHongKongandShenzhen,thecompanyhaspowerfulbackers,includingstate-owneddambuilderChinaThreeGorgesCorpandinsurerAnbangGroup,whichhasmadeastringofaggressiveacquisitionsoverthepastyear.MostofGoldwind’stechnology is licensedfromGermany’sVensys,althoughGoldwindhasmadealterationstotheoriginaldesigns.

MrWusaysGoldwind’srealcompetitor isnototherwindpowerproducersbutcoal.Currently,windpowergeneration inthenorthofChina(hometostrongandregularwinds)costsslightly less thanthermalpowergeneration inthesouth,wherecoal ismoreexpensiveandemissionsstandardsarestricter.However,coal ischeapest inXinjiangandnorthernChina, leavingwindpoweratadisadvantage in itsmostfavourableregion.

Furthertechnologicalimprovementsandincreasedeconomiesofscalecouldhelptonarrowthegap,MrWubelieves.“Ourcompetitorsarenot theforeigncompanies,”hesays,citingUNgoalsthatnon-fossilenergyshouldrepresent85percentofprimaryenergyconsumptiongloballyby2050.“Thermalpower iscompetingwithus.Thecompetitionbetweenwindandfossilenergy is fargreaterthanthecompetitionwithinthewindindustry.”

Additional reportingbyLunaLin

Wind farms power up in XinjiangProfile GoldwindTurbinemaker faces asaturatedmarket.By Christian Shepherdand LucyHornby

Turning circles:wind powerproduction inXinjiangprovince,western ChinaFeng Li/Getty Images

Videolearn moreabout thefuture ofwind powerin Xinjiangprovince

ft.com/goldwin

d

8 | FTReports FINANCIAL TIMES Tuesday 21 June 2016 FINANCIAL TIMES Tuesday 21 June 2016 FTReports | 9

Tomorrow’s Global Business Emerging Economies Tomorrow’s Global Business Emerging Economies

When items from the collections ofChinese fine jewellery brand Qeelinstarted to appear in US shops lastNovember, it was not just a case of ayoung company making a well-timedentry for the Christmas shopping sea-son. The move into departmentstoressuchasNeimanMarcus,aswellas smaller independent retailers, is asign of the growing ambitions ofAsian luxury companies to pushbeyondtheirhomemarket.

It was once the case that the globalluxury industry moved in only onedirection: west to east. The most dis-tinguished European and US brandswould buy up prime retail sites inAsian megacities, selling old-worldprestige to a new generation of afflu-ent spenders. For Asian buyers, thepleasure of owning a pair of shoes, ahandbag or a silk scarf was enhancedby the idea that some of the makersweremorethanacenturyold.

In recent years, however, a rise inoutbound Chinese tourism hasprompted companies to expandbeyond the domestic market. As Chi-nese customers have started to com-bine holidays abroad with shopping expeditions, Chinese brands havebeguntofollowthemoney.

“There’s a natural attempt to cap-ture [customers] as they travelabroad,” says Luca Solca, head of lux-ury goods at broker Exane BNP Pari-bas. The luxury research instituteHurun reports that France — home oflabels such as Chanel and Louis Vuit-ton — has emerged as the top holidaydestination for wealthy Chinese mil-lennials. Other popular destinationsinclude London, San Francisco andNew York. Closer to home, Japan andSouthKoreaarealso favoured.

The move to expand into theselocations is being led by the fine jew-ellery sector. Chow Tai Fook, the big-gest jeweller in the world by marketcapitalisation, says Chinese out-bound tourism was the main motiva-tion for its push into south-east Asiancountries, such as South Korea andTaiwan. The company, one of onlytwo listed arms of Hong Kong’s Chengfamily, had 2,319 stores in China,Hong Kong, Macau, Taiwan, Singa-pore, Malaysia, South Korea and theUSat theendofMarch.

More than 2,000 of the stores are inmainland China, but those overseas,

particularly in east Asia, are increas-ingly important. While the group pre-fers to run “large-scale advertisingand marketing campaigns [to]deliver a consistent brand image”,there are occasional regional tweaks.In April, for example, members ofTaiwanese boyband SpeXial wereenlisted to help drum up publicity fora store opening in the city of Taic-hung,Taiwan.

Tourist trendsarealso importanttoHong Kong-based jeweller Tse SuiLuen. Over three quarters of its 312stores are in mainland China and ithas three in Malaysia after expansioninthemid-1990s.

“Malaysia is one of the top touristdestinations among Asean [Associa-tion of Southeast Asian Nations]members, making the country anexcellent spot to attract visitors from

neighbouring countries and makethem aware of the Tse Sui Luenbrand,” says the brand’s deputychairman and chief financial officer,EstellaNg.

Some Asian brands are expandingafter having been bought by largergroups. Swiss luxury goods groupRichemont, owner of jewellersCartier, Van Cleef & Arpels andPiaget, took this approach with theacquisition in1998 ofShanghaiTang.

The fashion group, founded byHong Kong businessman David Tang,has 26 stores including outlets inLondonandMiami.

More recent examples are Qeelinand Shang Xia, a luxury label nowoperated by French luxury groupHermès. Qeelin, named after an aus-picious mythical Chinese beast,opened a store in Paris soon after itsofficial launch in Hong Kong in 2004.Acquired by French luxury conglom-erate Kering in early 2013, the Chi-nese jewellery brand is pushing intothe US, adding to its stores in HongKong,MacauandmainlandChina.

Qeelin began selling its products inthe US partly to meet demand fromthe “local Chinese community andChinese travellers”, according toChristophe Artaux, Qeelin’s chiefexecutive. “The US remains a strongmarket when it comes to luxury,” hesays. “The Chinese diaspora is verystrong in North America, especiallyonthewestcoast.”

The brand is also targeting abroader audience in the US, encour-aged by the performance of its Parisflagship store, where about 60 percent of customers are non-Asians.Having opened stores in Manila andSeoul, it is also eyeing Taiwan andAustralia.

“These [brands’ overseas expan-sions] are all really experiments,”says Mr Solca. Jeweller Luk Fook, forexample, has more than 1,400 storesbutonlyahandfulareoutsideAsia.

That Chow Tai Fook — with a mar-ket capitalisation of around $7bn —has a US presence is thanks to itsacquisition of American jewellerycompany Hearts on Fire in 2014.While Hearts on Fire’s products aresold in183retailoutletsacross theUS,itonlyhastwobrandedstores there.

Building a brand overseas will taketime, says Erwan Rambourg, globalco-head of consumer and retailresearch at HSBC. This is particularlytrue when it comes to establishingiconicdesigns thatareasrecognisablearound the world as a Chanel hand-bag, for instance.

“Storytelling is easy if you’ve beenaround a century or more,” Mr Ram-bourg says. “You don’t build luxurybrandsovernight.”

Asian brands go westchasing holiday shoppersLuxury

The affluent combineEuropean and US breakswith spending sprees,says Jennifer Thompson

Having started life as a horseharness business in Paris in1837, Hermès now presentsitself as a champion oftraditional French craftsmanshipand high-quality manufacturing.That message is echoed atShang Xia, the Chinese luxurybrand that Hermès opened in2008 with Jiang Qiong Er, aChinese designer (pictured)who studied in France forseveral years.

Its clothing, jewellery andhomeware are inspired bytraditional Chinese art andcrafts and their techniques.Items are displayed sparinglythroughout stores as if theywere pieces of art. Its boutiquesin Shanghai, Beijing and Pariscould be mistaken for smallgalleries or museums.

The Paris outlet opened in2013 and Shang Xia is lookingfor new openings “in the nearfuture”, the company says. JT

Profile Shang Xia

T he Brazilian website ofChinese automakerLifan Motors advertisesits compact sedan Lifan530 with a price cut of

about14percent.Lifan is a newcomer in a market

dominated by four US and Europeanmanufacturers — Fiat, Volkswagen,General Motors and Ford. It enteredBrazil in 2010, optimistic that its cost-effective offerings would do wellagainst its pricier competitors. Butlike other Chinese carmakers Chery,JAC Motors and Geely, Lifan arrivedin time to witness a crisis, as Brazil —the world’s fourth-largest car market— began a meltdown that started in2013andhassincegainedspeed.

“We would like, today, to be sellingabout 500 units per month, but weare in the range of 300 to 350,” saysJair Leite de Oliveira, director of salesat Lifan. “We would certainly be[meeting our target] if it wasn’t fortherapiddecline inthemarket.”

Political uncertainty because of theimpeachment process against DilmaRousseff, who has been suspended

fromherroleas thenation’spresidentduring the hearings, combined withwhat analysts say was economic mis-management by her government,have hurt Brazil’s growth story.Lifan’s situation reflects that of anautomotive industry which is at thecentre of the biggest economic slow-down for more than a century inLatinAmerica’s largesteconomy.

In early June, the national automo-tive producers association, Anfavea,predicted a 19 per cent year-on-yearfall insalesofpassengerandcommer-cial vehicles to 2.08m units, takingthe market back to 2006 levels. Thatfall would compound a 27 per centdecline in sales in 2015 comparedwiththeyearbefore.

“The level of consumer and inves-tor confidence is still being shaken bythe political and economic juncture,”says Antonio Megale, the president ofAnfavea. “There are expectationsthat there might be structuralchanges [in economic policy] andthat is leading people to postponetheirpurchases.”

The slowdown has frustrated the

ambitions of Lifan and its Chinesecounterparts to expand outside theirAsian bases. Latin America’s largesteconomy, and its rising lower middleclass, had seemed the perfect targetfor new producers. This new Brazil-ian consumer was seen as aspira-tional, yet acutely conscious of priceand value and open to trying newproducts.

Lifan had hoped to exploit thesetendencies by introducing some of itsbest models to Brazil, such as the X60sport utility vehicle, which the com-pany says has sold well despite thecrisis. “This has been the best-sellingChinese car in Brazil for two years,”saysMrLeitedeOliveira.

According to the vehicle importersassociation, Abeifa, Lifan sold 5,006cars in Brazil last year, just behindJAC Motors with 5,026. Chery sold3,948 and Geely 651. Of its total, Lifansold 3,082 X60s — outstripping by farany other model of Chinese car in themarket.

Despite this, all three companieshave been suffering this year. Chery’ssales are down nearly 52 per cent in

April compared with a year earlier,Lifan’s have fallen nearly 38 per centand JAC Motors by more than 34 percent.

During the boom of 2000-10, whenBrazil overtook Germany as theworld’s fourth-largest car market andlooked set to overtake third-rankedJapan, all four Chinese carmakersannounced they were consideringestablishingfactories inthecountry.

Brazil heavily taxes imported cars,providing an incentive for manufac-turers who want to sell large numbersto build factories in the country. Inthe end, Chery was the only large Chi-nese producer to open a plant, inau-gurating its facility in Jacareí, SãoPaulo lastyear.

As of last December, the plant wasoperating at only 10 per cent of its50,000-unitcapacity.

Chery says it hopes to begin export-ing an initial 1,000 cars from the SãoPaulo plant, starting with exports toArgentina this year. “The past yearhas not been easy,” Luis Curi, vice-president of Chery Brasil, said in astatementtothepress.

Chinesecarmakersstall as Brazilhits the brake

ManufacturingConfidence is being shaken byan economy in crisis, reports Joe Leahy

Also caught out by the crisis wasJAC Motors, which in 2012 had laidthe foundation stone for a new plantinCamaçari, in thenortheasternstateofBahia,buthasyet tobuild it.

Brazil’s ministry of development,industry and foreign trade last monthsaid it would begin seeking the repay-ment of tax breaks awarded to JACMotors for setting up local produc-tion, alleging the carmaker had notfulfilled its promises to build the fac-tory. JAC Motors responded that theproject was still under way, with theplant due to be inaugurated earlynextyear.

L ifan had also contemplatedlocal production, but wasusing a plant in Uruguay —part of the Mercosur tradebloc of countries that also

includes Brazil, Argentina and Vene-zuela. This enabled Lifan to producevehicles in a tax-efficient mannerwithin the region, while it waited toseehowtheBrazilmarketevolved.

“Tohavean industrialmanufactur-ing operation in Brazil you have to

have a certain minimum volume,”says Sidney Levy, an executive atLifan in Brazil. “Lifan does not havethe scale to justify manufacturing inBrazil,butweareonthewaythere.”

Instead, he says, the company hasbeen working on customer service totry to lift its brand image for when themarket begins to recover. Given theChinese automakers’ lack of brandrecognition, the strategy was to mar-ketLifanthroughalimitednumberofcar dealerships, which would recom-mend the brand to customers. Thecompany was also focused on post-salesservice.

Lifan, along with Chery, was amongthe nine automotive manufacturersranked best on Reclameaqui.com.br,a site for consumer complaints. Theso-called “big four” US and Europeancarmakers were listed as among theworst. Mr Leite de Oliveira saysrecovery in the market could be slow.“We are starting to perceive a changein attitude, with more people visitingdealerships,” he says. “But actualgrowth, I think, will only be towardstheendof theyearor in2017.”

Brazil plant: Chery is the onlylarge Chinese carmaker tohave opened a factory in Brazil

‘Wewould certainly be[meeting our target] if itwasn’t for the rapiddecline in themarket’

10 | FTReports FINANCIAL TIMES Tuesday 21 June 2016 FINANCIAL TIMES Tuesday 21 June 2016 FTReports | 11

Tomorrow’s Global Business Emerging Economies Tomorrow’s Global Business Emerging Economies

Emerging challengers

CITICGazpromState Grid Corp. of ChinaPetroliam Nasional Berhad (Petronas)RosneftChina National Petroleum Corp.PetroChinaChina Petroleum & ChemicalChina Huaneng GroupChina State Construction EngineeringSaudi Basic IndustriesPetróleo Brasileiro (Petrobras)America Movil China Huadian Huawei Investment & HoldingChina Resources National Corp.China GuodianShenhua GroupChina Nat. Offshore Oil Corp. (CNOOC)China DatangTencentLukoilChina Southern Power GridReliance IndustriesChina Telecom

Company NameChinaRussiaChina Malaysia RussiaChina China China China China Saudi ArabiaBrazil Mexico China China China China China China China ChinaRussiaChina India China

Country30,29920,85714,21813,63910,681

9,8779,3708,9308,4488,2667,8137,6947,4887,0306,9576,6596,6456,5835,9475,9195,5785,3924,2974,0434,031

EBIT$m

911-3

-3014

-64-65-23

114

-22-2

-115

230

-3-39-59

540-11610-7

Growth(%)

Most profitable EM companies that make morethan an estimated 10% of revenues abroad*

Profits, 2015

71,62994,978

315,20261,14278,787

306,895262,562307,071

40,891133,999

39,48695,04749,27830,11860,19273,22829,23636,03464,92625,29615,68289,90771,43456,33450,492

$m

2.58.6

-1.0-24.8

-6.3-26.1-24.4-28.6

-7.610.1

-21.6-4.65.4

-6.837.1

4.3-10.1-27.2-30.3-10.830.3

4.4-0.6

-13.62.1

Growth(%)

Revenues, 2015 Profits, 2015 Revenues, 2015

Tata MotorsChina Comms. Construction Tata Consultancy ServicesSasolChina Railway ConstructionJardine MathesonChina Railway GroupJBSPTTAviation Industry Corp. of ChinaCRRC Corp.China United Network Comm. LtdChina National Pharmaceutical GroupFEMSA (Fomento Economico Mexicano)Koc Holding China Aerospace Science and Tech. Corp.Power Construction Corp. of China VALE China National Chemical China Aerospace Science and IndustrySinopharm Group China Energy Engineering GroupChina Metallurgical GroupPegatronSOCAR

Company NameIndia China India S. AfricaChina China China Brazil Thailand China China China China MexicoTurkey China China Brazil China China China China China TaiwanAzerbaijan

Country3,8873,5493,4023,1993,1962,7822,7042,6792,5702,4872,3271,9211,8811,8551,8341,7961,7611,6891,5621,5021,3951,3301,2801,2281,181

EBIT$m

1712-50

10-24

017

-4335

9-371513

15214

-13-6736

01724-34012

Growth(%)

39,38561,62614,18512,51391,38537,00794,89147,99557,68958,16536,81442,23642,44817,03723,99327,18832,15525,18839,67625,26034,61731,35833,83337,56623,359

$m

12.910.315.7-8.61.2

-7.31.9

35.2-22.2

-0.88.9

-4.012.918.3

1.37.1

11.0-3.11.05.2

13.511.9

0.619.0

-11.2

Growth(%)

FT graphic Sources: S&P Capital IQ; FT research * From the top 100 based on revenues, 2015. All financials converted at current exchange rates Photos: Bloomberg; Getty

Making waves

The companies below are all featured in this report and represent some of the leading emerging market corporations in their industries. Their experiences show that while some are taking the world by storm, others are encountering stiff headwinds as they attempt to break into territory dominated by established multinationals.

Infosys, IndiaIn common with its Indian competitors Tata Consulting Services and Wipro, Infosys is starting to shift its business model away from providing a fixed information technology service at a fixed cost. It is now increasingly investing with the client, putting skin in the game to generate revenues jointly.

Goldwind, ChinaFive of the top 10 wind producers today are Chinese and Goldwind currently sits at the top of the global rankings by production. A protected domestic market helped Chinese wind firms make headway after Beijing blocked European firms from selling to China’s wind farms between 2003 and 2009.

Jollibee Foods Corp, PhilippinesA multinational owner of fast food restaurants headquartered in Pasig, Philippines, Jollibee has more than 3,000 stores worldwide under several brands including Yonghe Dawang and Hong Zhang Yuan in China. Sales in the US have been strong, following store openings in Virginia and Texas.

Chow Tai Fook, Hong Kong/ChinaChow Tai Fook is the biggest jeweller in the world by market capitalisation, and has 2,319 stores across China, Hong Kong, Macau, Taiwan, Singapore, Malaysia, South Korea and the US. Outbound Chinese tourists are a big money spinner for the Hong Kong-based company.

Grupo Bimbo, MexicoThe Mexico-based bakery giant Grupo Bimbo has around 129,000 employees, 165 manufacturing plants and 2.5m sales outlets in 22 countries in America, Europe and Asia. A serial acquirer of overseas companies, Bimbo derives more than half of its net sales from outside Mexico.

Lifan Motors, ChinaOne of a group of Chinese carmakers, including Chery, JAC Motors and Geely, to have entered the Brazilian market in recent years and taken on the so-called ‘big four’ (Fiat, Volkswagen, General Motors and Ford). The company also makes motorbikes in Thailand, Iran, Turkey and Vietnam.

China CommunicationsConstruction Group, ChinaChina’s state-led ‘One Belt, One Road’ initiative to finance and build infrastructure in more than 60 countries helped the state-owned China Communications Construction Corporation – the country’s largest infrastructure builder – to post a net profit of Rmb15.8bn ($2.4bn) in 2015.

Sany, ChinaThe world’s biggest producer of concrete mixers and a leader in almost all other types of construction equipment, Sany has been expanding beyond its home market for more than a decade. It took 10 years for Sany to turn a profit in the US, having paid insufficient attention to after-sales service.

India’s informationtechnologyservice companies have longheld reputations as innova-tors, but in recent years theground has begun to shift. Themodel that allowed them togrow effectively — deployingcheap labour to perform sim-ple IT tasks — is itself beingdisrupted by advances intechnology.

As a result, analysts expectcompanies such as Tata

Consultancy Services (TCS),Infosys and Wipro to movefrom a strategy based on highheadcountandlowcosts toonereliant on higher employeecostsandflexibleservices.

“Their financial model isunder stress. It’s that simple.They can’t just keep hiringfreshers [out of college] tokeep costs down,” says PankajKapoorof JMFinancial Institu-tional Securities, a Mumbai-based brokerage. “Clientsknowdatacentrescanbeoper-ated by one person now, sowhy do Indian companiesneedsomany?”

As their clients movetowards automation, artificialintelligence and cloud com-puting, India’s IT companies

are being forced to redefinetheir pitches. “Our context hasfundamentally and irreversi-bly changed and we cannot goback to the approaches andmethodsof thepast.Theworldas we know it has been trans-formed,” wrote Vishal Sikka,chiefexecutiveof Infosys, in its2015-16annualreport.

Wipro’s chief executiveAbidali Neemuchwala sharedsimilar concerns with theIndian newspaper BusinessStandardinApril.

“It’s very simple. Thenumber of people required inthe lower end of the pyramid isgoing down. Robots and botsare taking over. You will see aslowdown in hiring across theindustry.”

Infosys, Wipro and theirrivals are now revising theirold service model: to provide afixed IT service for a fixed cost.

“We have started seeingmodels where we are jointlyinvesting with the client,putting skin in the game,” saysPravin Rao, chief operatingofficer of Infosys. “I go to theclient saying: ‘We believe thatby applying these technolo-gies, leveraging them, we canbring you benefit. You can payme based on the number oftransactions, or based on thepercentage of revenue I drive,or the kind of cost savings I do.’It’s probably a small percent-age of the business right now,but over the next five years itwillbecomemuchlarger.”

UBS’s Indian equities teamthinks revenue growth in theindustry could fall to 8-6 percent in 2020 from 13 per centin 2015. UBS analysts say thebelow-consensusestimatesarebased less on cyclically weakmarkets and more on increas-ing pressure on “legacy serv-ices”, which they say make up85-90 per cent of total reve-nue, and “shrinking contractsize” that may weaken incre-mentalrevenuegrowth.

They argue, too, that busi-ness model disruption has notbeen priced in and that as the“revenue disruption” of digitaltechnologies becomes morevisible the industry will sufferastructuraldecline.

Mr Rao admits the value of

deals is falling: “Earlier, any-thing from $300m-$500mover five to 10 years was possi-ble, but today the large dealsize is typically $100m-$150mforthreeto fiveyears.

Those deals will also come inchunks based on performancefor defined tasks, said Mr Rao.“You will do business in incre-mental $5m-$10m chunksratherthaninabig-bangway.”

But, he argues, this does notnecessarily equate to lowergrowth. “Client spend on IT isthe same or probably increas-ing 1 or 2 per cent a year. Aslong as we have the capabilityand competency, there is anopportunity for us to capture alarger share of the pie and con-tinuetogrow.”

Automation threatens India’s IT services modelTechnology

The high-headcountlow-cost approachhas been disrupted,writes David Keohane

O ver the past two dec-ades, China’s construc-tion companies havebuilt more infrastruc-ture more quickly than

ever before. Now, spurred by theworld’s most powerful developmentfinance institutions, they are lookingoverseas tostagetheirsecondact.

The China Communications Con-struction Company (CCCC), whichranked 151st in the 2016 Fortune Glo-bal 2000 of leading companies, typi-fies the global ambitions that are ani-matingthebigChinesebuilders.

“Our ultimate goal is to have 50 percent of our revenue from overseas,”Fu Junyuan, CCCC’s chief financialofficer, toldreporters thisyear.

Although he did not give atimescale or say what proportion ofcurrent business derives from foreignshores, he did say that the company’sinternational order book was much

more vibrant than its domestic coun-terpart.

Africa was a particular bright spotfor CCCC, which employs 112,000people in 130 countries. At least threeprojects in Kenya were signed in thefirst quarter of this year, worth a totalRmb5.4bn ($820m), Mr Fu said.Permission to resume a controversial$1.4bn port city development in SriLanka was also obtained in the firstquarterof2016.

This same urge to expand abroad isdriving the China Railway Group’sattempts ramp up its internationalbusiness to compensate for softeningdomesticdemand.

The China Railway Group plans toboost the share of its revenue thatcomes from overseas to at least 10 percent by the end of 2020, up fromabout 5 per cent last year, accordingto Li Changjin, chairman of theconstruction group. The company is

working on 405 construction projectsin 68 countries. These include the427km China-Laos railway and the329km Ethiopian national railway.“The current representation of over-seas business is low, but that alsomeans a huge room for improve-ment,” Mr Li told reporters recently.The 4,400km-long South AmericanTwin Ocean railway project, linkingthe coasts of Brazil and Peru, ranks asthemostambitiousplansofar.

The scale of such ambitions mightappear absurd were it not for thebacking of the world’s most powerfuldevelopment finance institutions,which often suggest Chinese contrac-tors to carry out the projects to whichthey lend.

Two Chinese policy banks — theChina Development Bank and theExport-Import Bank of China — hadoutstanding loans to overseas bor-rowers amounting to an estimated

$684bn at the end of 2014, just shortof the $700bn owed to all six of thewestern-backed development insti-tutions put together, according to astudy by Boston University and theChineseAcademyofSocialSciences.

Such largesse is not expected to dis-sipate as Beijing rolls out its “OneBelt, One Road (OBOR)” initiative, aplan to build infrastructure in morethan 60 countries between China andEurope, with an estimated invest-ment of about $900bn over the nextdecade. “There are a lot of additionalfunds available because the OBORinitiative will accelerate overseasexpansion,” says ChristophNettesheim, senior partner at BCG, aconsultancy, in Singapore. “You cansee this already, the Chinese con-struction and construction-equip-ment companies are very active inOBOR-relatedareas.”

Chinese construction-equipment

companies such as Sany, Zoomlionand XCMG are also pursuing ambi-tious international expansion plans,according to a study by the UBS Evi-dence Lab, which analysed about15,000 construction equipment deal-ershipsaroundtheworld.

The Chinese companies are likelyto boost their global market shareoutside China to about 15 per cent by2025, up from about 7 per cent cur-rently,accordingtotheanalysis.

“We think the Chinese are makingmoves to expand further into thewest and we think they have a verygood chance to take market share, ifthey are fully committed to doing so,”saysStevenFisher,UBSanalyst.

Mr Fisher says the biggest competi-tive advantage of Chinese companieswas a relatively low cost base thatallowed them to offer discounts in theregion of 15-40 per cent to equivalentpremiumbrandequipment.

Constructioncompaniesstage secondact overseasInfrastructureLow cost basewill give them acompetitive advantage, says James Kynge Back to work: the Colombo Port City Project was temporarily suspended in 2015 — Buddhika Weerasinghe/Getty Images