pra global business development presentation to global business club of mid-michigan

PRA Global Business Development

PRESENTATION TO

Global Business Club of Mid-Michigan

MSU Henry Center, Lansing, MI

17th November 2011

MAXIMIZING BUSINESS OPPORTUNITIES IN EMERGING MARKETS

A COMPARISON OF BUSINESS OPPORTUNITIES IN

CHINAINDONESIA

BRAZIL

TO “COMPARE” OPPORTUNITIES, YOU NEED SOMETHING TO “COMPARE” AGAINST.

I HAVE CHOSEN THE USA, AS WE ARE ALL SOMEWHAT FAMILIAR WITH OUR HOME TURF.

I WILL ALSO CROSS-RELATE EACH OF THE THREE COUNTRIES TO EACH OTHER

THE OBJECTIVE IS FOR YOU ALL TO HAVE AN “OPPORTUNITIES PERSPECTIVE” BY THE END OF THE DISCUSSION.

THIS IS A LARGE TOPIC TO COVER IN 30 MINUTES. THERE WILL BE LITTLE OR NO TIME FOR QUESTIONS AT THE

END OF MY SESSION.

THEREFORE, PLEASE WRITE YOUR QUESTIONS DOWN OR THEY MAY BE FORGOTTEN.

IF WE DO NOT GET TO ANSWER YOUR QUESTION, SEEK ME OUT, EMAIL ME OR CALL ME.

THIS PRESENTATION IS NOT OVER UNTIL YOU HAVE ALL HAD YOUR QUESTIONS ANSWERED.

WHERE ARE YOUR GROWTH OPTIONS?

Today the Developed Markets of the USA, Canada and the EU are not really growing, they are just idling along.

There are however, plenty of “Growth Markets” that are growing quickly, creating an increasing “Middle Class”, and generating significant demand.

We in PRA-Global however, don’t think or talk about the “Middle Class”, we only think about the amount of “Disposable Income”

Disposable Income is money they can spend on something other than just living or on a “Better Quality of Living”

We submit that for US Companies to grow significantly, our future lies in Globalizing our Perspective and going after opportunities in these and other “Growth Markets”

WHERE ARE YOUR GROWTH OPTIONS?

While there are an increasing number of “Growth Markets”, usually referred to as the “Emerging Markets” today I am only going to concentrate on:

ChinaIndonesiaBrazil

“Our Comparison Model”

Let’s start with our BASELINE of the USA.

A few basic statistics to allow us to compare

“OUR COMPARISON MODEL”

“OUR COMPARISON MODEL”

USA Basic Data: Size……………9.4 Million Square Kilometers Population……309 MillionGDP………….$14.1 TrillionGDP/Head….$46,350Imports………$2.1 TrillionFrom: China 17%, Canada 16%, Mexico 10% Exports………$1.3 TrillionTo: Canada 20%, Mexico 12%, China 6%

EMERGING MARKET “CHINA”Geography of China

EMERGING MARKET “CHINA”

EMERGING MARKET “CHINA”Political Reality of China

THE POLITICAL REALITY OF CHINA

THE FREE WORLD IS JUSTIFYABLY “PARANOID” ABOUT COMMUNISM,

BUT CHINA IS NOT A COMMUNIST COUNTRY……… IN ANYTHING BUT NAME.

CHINA , IN REALITY, IS A “CAPITALIST AUTOCRACY”

THE EMPEROR HAS JUST BEEN REPLACED BY THE PARTY! TWENTY ONE OF THEM WHO PULL THE STINGS OF

“Hu Jin Tau” and “Wen Jia Bao”

LIKE MANY POLITICIANS, THEY ARE PRIMARILY ……..LOOKING OUT FOR THEMSELVES.

THE BUSINESS REALITY OF CHINA

ALSO REMEMBER: CONTRARY TO POPULAR OPINION,

COUNTRIES DO NOT DO BUSINESS !

POLITICIANS DO NOT DO BUSINESS !

EVEN COMPANIES DO NOT DO BUSINESS !

ONLY PEOPLE “DO BUSINESS” One on One

IF WE WANT TO “DO BUSINESS WITH THESE CHINESE PEOPLE, LETS PUT A FACE ON THEM

So……………….Who exactly are these Chinese People ?

THE PEOPLE REALITY OF CHINA

OUTLINE OF THE SIGNIFICANT CULTURAL DIFFERENCES BETWEEN CHINA AND THE WESTFirstly, the Chinese are not a homogenous Nation

……………………any more than the West. There are distinct regional differences They speak different languages (Seven of them)

however, they write with one common set of charactersThey are not brainwashed with ideological preconception

……….at least, not any more than we are! They are very nationalistic and proud of ChinaThey are very well educatedThey are fundamentally honest and trustworthyThey are peaceable,

and China is virtually crime free for us

THE PEOPLE REALITY OF CHINA

OUTLINE OF THE SIGNIFICANT CULTURAL DIFFERENCES BETWEEN CHINA AND THE WEST

They are exceedingly family orientedThe women are far from under-privileged!They work very well in teams and collaborate easilyThey save money

…….as much as 40% of their incomeThey are very selective about what they buyThey love to eat, drink and sing songs togetherThey have an excellent sense of humorThey are very, hard workingThey are excellent business people

…..and rightfully deserve what they have built over the past 20 years

THE BUSINESS REALITY OF CHINA

BUSINESS TRAITS

No word in Chinese for YES, ………. and no word for NO!

Relationships are still ImportantChinese Sense of Time and Schedule is Different Motivation and End Objective can be very DifferentNegotiation techniques are different and vary from region to region. Know what you need!Do not listen only to what is being said….

….listen for what is not being said!Always be respectful to the older person, even if they do not appear to be the leaderIn a tense situation, a little humor can make the difference—

…….but aim the joke at yourself!The Chinese count in units of 10,000. Confusing…….?

Get them to write the number down!

EMERGING MARKET “CHINA”Industrial Base of China


Economy of China

“CHINA COMPARED TO THE USA”

USA Basic Data: CHINA:

Size……………9.4 Million Square Km 9.6 M- M/Sq/Km 102%

Population……309 Million 1.34 Billion 434%

GDP………….$14.1 Trillion $5.33 38%

GDP/Head….$46,350 $3,270 7%

Imports………$2.1 Trillion $1.1 Trillion

From: China 17%, Canada 16%, Mexico 10% Japan 13%, EU 12% Kor 11%

Exports………$1.3 Trillion $1.4 Trillion

To: Canada 20%, Mexico 12%, China 6% EU 21%, USA 19%, HK 13%

BUSINESS IN CHINA

OVERVIEW OF BUSINESS CLIMATE IN THE CHINA MARKET AS OF THE 1st QUARTER OF 2011

China Economy is expected to have grown at 9.3 % during 2011

Industrial Production grew at 18.5% as of December 2010

GDP $5.33 Trillion They have overtaken Japan as #2 in the World.

Inflation 2.4%

Consumer Prices were down 0.8%

Unemployment rate was 10.2%

SUMMARY: In the past years there was a surge in Bank Lending and there is now a fear of a Stocks and Property asset bubble.

However, measured against any scale, the China Economy is still growing significantly and the demand for all products is grows within the China market! Industrial, Manufacturing, Food, Beverages and Luxury items are particularly valued.

The Economy is based on Manufacturing and that grows significantly every year.

The Automotive Sector predominates, and like the USA creates multiple other business opportunities and spreads the wealth.

China have set their sights on everything from Power Stations to Aircraft and they intend to be the principle manufacturing base in the World

Why?

The politicians need to keep their people under control, and work, opportunity, and progress is the best way

The Confucian “Mandate of Heaven” is still alive and well in China

The next step is to make China internally self sufficient so that the local population buy the majority of the manufacturing capacity.

BUSINESS IN CHINA

EMERGING MARKET “CHINA”Business Opportunities in China

BUSINESS OPPORTUNITIES in CHINA

MANUFACTURING FINISHED PRODUCT FOR CHINA MARKET

Specifically target the China Market

Design the product for the local market. Critically important.

Own and invest in a Chinese Operation, run by your Chinese managers, for the China market

Set up a Marketing Strategy, local distribution and establish sales and demand, before you invest in an operation

If necessary, import into China from existing operations, even at a loss, to prove out the market. Less expensive than an investment mistake!

Plan to dominate a market segment and focus on that success……….you can always grow once your first operation is profitable.


WHY CHINA?


1.4 Billion

HOWEVER, BEWARE

Old Chinese Proverb:

“Just because two of you sleep in the same bed, doesn’t mean you are having the same dream”

You do not have to “Work Alone”

and there is no need for your China Business to be a Nightmare!

INDONESIA

EMERGING MARKET “INDONESIA”

Geography of Indonesia

Democratic government faces many challenges after years of military dictatorship (Sukarno and then Suharto) and social turmoil:

Military Dominance and Separatist Tensions

Devastating tsunami in 2004 in Banda Ache

Target of terrorist bombings in 2005 in Bali

Member of OPEC but left in 2008 when oil ran out

Now forced to grow export earnings as an emerging low cost country

POLITICAL REALITY OF INDONESIA

President Susilo Bambang Yudhoyono

Tsunami Recovery is slow

Terrorist Bombings 2002 and 2005

THE CULTURAL REALITY OF INDONESIA

OUTLINE OF THE SIGNIFICANT CULTURAL DIFFERENCES BETWEEN INDONESIA AND THE WEST

Firstly, the whole country is made up of 17,000 islands with multiple cultures, languages and objectives. Only about 6000 islands are occupied.

Each of the regions is very different in terms of business attitudes and tolerance for commercialization.

There have been forced relocations to remote areas, and there are still tensions between the new comers, who did not want to be there, and the locals, who do not want them there.

Indonesia is dominantly a Muslim country, however, they have proven to be intolerant of “Violent Islam” The Bali Bombers were executed, and the country did not revolt.

However, Chinese Businesses and Christian locations are still targeted during social unrest.

THE CULTURAL REALITY OF INDONESIA

OUTLINE OF THE SIGNIFICANT CULTURAL DIFFERENCES BETWEEN INDONESIA AND THE WEST

Java is the center of Government and Western Business, however there are many opportunities, in the other islands, all over the country.

The local populations everywhere are very young, keen to move up economically, vary significantly in beliefs and needs, but all are friendly and welcoming of foreigners.

All are welded together by the “Lingua Fanca” of “Bahasa Indonesia”.

Everyone gives you the impression that they are desperate for growth and modernization.

Although many are reasonably well educated, English is still not universal

They are thoroughly likeable people who are fundamentally honest and trustworthy


Economic Reality of Indonesia

“INDONESIA COMPARED TO THE USA”USA Basic Data: Indonesia:Size……………9.4 Million Square Kilometers 735,000 Sq/Km 20%

Population……309 Million 234 Million 76%

GDP………….$14.1 Trillion $511 Billion 3.6%

GDP/Head….$46,350 $2,250 5%

Imports………$2.1 Trillion $129 Billion 6%

From: China 17%, Canada 16%, Mexico 10% Sin 13%, China 12% Jap 12%

Exports………$1.3 Trillion $137 Billion

To: Canada 20%, Mexico 12%, China 6% To Jap 20%, US 10%, Sin 9%

OVERVIEW OF BUSINESS CLIMATE IN THE INDONESIAN MARKET AS OF THE 1st QUARTER OF 2011

Indonesian Economy is expected to grow at 5.5 % during 2011

Industrial Production grew at 1.8% as of December 2010

GDP $511 Billion (Up by 4.6% on 2010)

Inflation 5.1%

Consumer Prices were up 4.8%

Unemployment rate claimed to be 8.1% but under-employment is rife

SUMMARY: A strong domestic market and low trade dependency helped them weather the global slump. Difficult economics and ongoing political machinations will hold up progress but the country is a strong contender as a low cost labor country. I believe it will quickly take its place as one of the worlds economic player.

ECONOMY OF INDONESIA


Industrial Base of Indonesia

Pertamina Oil refinery in Jakarta Plywood

Light Industry such as Electric Lighting and Appliances Mining of Gold and Copper


Business Opportunities in Indonesia

New Low Cost Manufacturing MarketAgricultureTextilesWood ProductsRubber ProductsLight Industry such as Electrical Lighting and AppliancesAutomotive

Honda and VW manufacturing components for export to AsiaEmerging Domestic Automotive Market:

Key Challenges Must quickly develop highway infrastructure and power plants to keep momentum going Continued government controversy over corruption Growing workforce to employ - 4th most populous nation will keep salaries low

BUSINESS OPPORTUNITIES in INDONESIA

The growing Manufacturing Base is creating work, and generating an emerging middle class with their all important “Disposable Income”

This leads to the demand for western style consumer products, however, as a majority Muslim society, they do not drink much alcohol. Everything else is desired!

Although an “Early Play”, it is a country with tremendous opportunity ..........

...................234 Million of them!

Sourcing is also potentially a realistic play today,

However, large scale selling to the local population is still a few years away.



MANUFACTURING FINISHED PRODUCT FOR THE INDONESIAN MARKET

This would be a Higher Risk “Early Entry “ Strategy, but high reward potential.

Specifically target the Indonesian Market and specifically design the product for that local market. Critically important.

Own an Indonesian Operation, run by local managers, for the local market

However, Indonesia is far more poor than China, and far less well developed.

With some minor exceptions, local dietary traditions have yet to be displaced by Western foods. Will Kentucky Fried Chicken replace Ayam Goreng

It is only a matter of time and if you have the appetite for an “early market play”, and the patience to wait for the market to develop, Indonesia could work for you.

Plan to dominate one market segment and focus on that success………. you can always grow once your first operation is profitable.


THE LAW AND GOVERNMENT INTERFERENCE IN INDONESIA

The Government are in transitions in Indonesia. Younger entrants are trying to displace the old Cadre.

Government policy is still evolving and good local advice necessary to ensure your business will not be negatively impacted by changes in local Government or Jakarta Policy.

Plan to minimize cash investment in the early days. Only build the minimum structure to meet your immediate needs.

Third party as much as possible.

Aim to own the access, the rights and the commitment of your suppliers.

Finally, once well established, plan to own and invest in an Indonesian Operation, run by local managers, for the local market


THE INDONESIAN MARKET IS A SOURCING AND LOW COST LABOR VALUE ADD MARKET.

THE OPPORTUNITIES TO SELL TO THE INDONESIANS IS AN “EARLY PLAY”.

HOWEVER, INDONESIA WILL DEVELOP AND BECOME A SELLERS MARKET, PROBABLY WITHIN THE NEXT 5 YEARS.


WHY INDONESIA ?


234 Million

BRAZIL

EMERGING MARKETS “BRAZIL”The Geography of Brazil

EMERGING MARKET “BRAZIL”The Political Reality of Brazil

POLITICAL REALITY IN “BRAZIL”

POLITICAL REALITY

Brazil has suffered for years under inept and corrupt self serving Politicians.

In 2002 President Lula Da Silva, originally the leader of the Brazilian Workers Trade Union movement, was elected to power. He was re-elected in 2007 for a second term. His running mate was Dilma Rousseff

In November 2010 Dilma Rousseff was elected to power.

Under both Presidents, the Government is characterized as:

Fiscally ResponsibleSomewhat Bureaucratic but workableHave reacted and responded with reasonable speed Have definitely taken the role of “Protector of the

Workers”

POLITICAL REALITY IN “BRAZIL”

POLITICAL REALITY

The System in Brazil does work. You do not need “Friends” to get things done, but just as in Washington……….”Friends can help.”

The Government have done little to encourage Free Trade

Protectionism is alive and well with Import duties that can add up to 100% more on the cost.

The good news is that it applied evenly to all imports.

The intent is to encourage local business.

The reality is that local Brazilians pay much more for just about everything in Brazil. It is an expensive living environment.

EMERGING MARKET “BRAZIL”The People of Brazil

The People of Brazil

Brazilians consider themselves to be Americans, not South Americans or Brazilians.

However, their focus is far more towards Europe and their colonial roots than to the USA. In looking for solutions they often turn to the European model first.

They speak Portuguese when everyone else speaks Spanish and are annoyed when spoken to in Spanish. It is doubly confusing because they can better understand Spanish from their Portuguese Language Roots than the Spanish speakers can understand Portuguese with its French and Basque base.

Infrastructure in Brazil is very local. Roads can be very good and then degenerate into cart tracks. Spending on Roads is however a priority and is getting better.

Air travel works well but is expensive, and there are more Private Helicopters and Ferraris in Sao

Paulo than anywhere in the world.

Most US Businesses struggle initially in Brazil, however, it is totally manageable. If you have business interests that are directly related to the need to deliver in Brazil, you can be successful there.

The People of Brazil

BEWARE.

Brazilians, particularly the Ladies, cause many Western men confusion by their very physical communications style. To American men it feels just like a major come on, and it is embarrassing for both parties for it to be misconstrued……….. By that I mean that repeated touching is, to Brazilians, just a part of talking. The men also hug and touch a lot!

I was told that a genuine invitation to further friendship will be much more obvious. …………!

For Western Ladies, Brazilian men can be equally confounding as they feel as if they are being “Hit On”, all the time when it is really only their intense and friendly manner.

Brazilians think we are very cold and unwelcoming.

Football--Futchibol

Dilma RousseffCarnival

B-B-Q

CONDIMENTS

THE CULTURAL REALITY OF BRAZIL

Brazilian business is ultimately courteous, but lacks a real sense of urgency. Getting things done can be frustrating.

The Sense of timing is relaxed. Business meetings are getting better but do expect to over-run. Sao Paulo is the most punctual!

Meetings tend to include everyone including the toilet cleaner. They strive for consensus in meetings and that adds to the over-run.

Meetings are very courteous affairs, which can be confusing because if they are really frustrated with you, but you are not sensitive to their style, you can leave thinking that everything is OK……….. Big Mistake!

Socially, if you are invited to dinner at 8pm, do not turn up before 9 or 9:30. If you do the Hostess will not be dressed and you will have to wait!

EMERGING MARKET “BRAZIL”

The Economy of Brazil

Economic Reality of BRAZIL

Brazilian Economy grew 7.5% in 2010

Brazilian Economy expected growth in 2011 is 5%

GDP $2.194 Trillion

Inflation 6.0% in 2010

Consumer Prices were up 4.9%

Population 197 Million

Unemployment rate was 6.8%

SUMMARY: Thrifty economics management has cushioned Brazils economy. Growth has already resumed.

BRAZIL COMPARED TO THE USA

USA Basic Data: Brazil:

Size……………9.4 Million Square Kilometers 8.5 Million Sq/Km 90%

Population……309 Million 194 Million 63%

GDP………….$14.1 Trillion $1.58 Trillion 11%

GDP/Head….$46,350 $8210 18%

Imports………$2.1 Trillion $202 Billion

From: China 17%, Canada 16%, Mexico 10% US 15%, China 14%, Argentina 8%

Exports………$1.3 Trillion $422 Billion

To: Canada 20%, Mexico 12%, China 6% China 15%, US 10%, Argentina 9%

EMERGING MARKETS “BRAZIL”The Business Reality of Brazil

Virtually everything in Brazil is forecast to be on a large scale

Natural Resources

Automotive Manufacturing

The Whole Future!

BUSINESS REALITY IN BRAZIL

A Note of Caution:Dilma has been in office for one year and has demonstrated that she is very much her own person. Has fired corrupt officials apparently against Lula’s advice.

Not everyone likes that!

Ex-President Lula has just this past week been diagnosed with Cancer of the Larynx. Expected to survive but not to be able to talk for while?

Mass Governmental Corruption is rearing its head.

There are signs of a slow down, but it may just be a stabilization.



It is best to assume that only localized business can be successful in Brazil

Moreover, Brazilian owned companies are generally inefficient and sound US Business practices can be very successful in this highly competitive field .

Labor Laws are strongly in favor of the employee in Brazil, and starting a Company is not for the faint hearted.

Once up and running it is imperative that everything is 100% documented and all follow up is correct and within the law.

Starting a Company is easy, shutting it down is very complex and often takes many years

However, there is a lot of money being made in Brazil in the Mining and Automotive sectors.

And as the Brazilians like to tell you………just not always by Brazilians!


OTHER INDUSTRIAL BASES OF BRAZIL

Brazil in terms of Natural Resources, is a very wealthy country

Brazil has Natural Resources in:The Rain ForestLandBauxite, Gold, Iron ore, Manganese, Nickel, Phosphates, Platinum, Tin, Uranium, Petroleum………maybe more than Saudi Arabia has!


Brazil is self dependent on Ethanol…….Produced from Sugar which grows freely.

However, Automotive is also a very significant Industrial sector. 3.69 million vehicles are expected to be sold in 2011, up by 11.3% over 2010.

Costs are high with a Honda Civic that sells for $16K in the USA costing the equivalent of $30K in Brazil . A Honda Civic is therefore an Executives Car in Brazil.

Other industries:

Agriculture – 6%

Industry (steel, aircraft, chemicals, petrochemicals, machinery, etc. – 28%

Services (telecommunications, banking, energy, commerce, etc – 66%

The Economics of Business in Brazil

Sourcing off-shore to Import is not economically viable in Brazil. Brazilian companies enjoy considerable protection from imports. This has been the case since “workers rights” was enshrined in 1888 when slavery was outlawed in Brazil.

The largest concentration of Manufacturing and Business is in the State of Sao Paulo. Many of them work out of Compounds or co-located fenced work zones. Frequently they include Banking, Medical and Dental facilities. Most of these compounds are very secure and armed guards are the norm.

There are other concentrations but they are small compared to Sao Paulo

Brazilian workers expect to be looked after “hand to mouth” and Cradle to Grave. Needless to say, with Lula in power the Unions were King!


MERCOSUR (Southern Common Market)Started in 1991Full Membership. Argentina, Brazil, Paraguay, UruguayAssociate Members. Bolivia, Chile, Colombia, Ecuador, PeruFree Trade Zones and Export Processing Zones

Tierra Del Fuego (Argentina)Manaus (Brazil)


If you have business opportunities there remember………….

Brazil has a lot of real Bureaucracy, and the Bureaucrats feel little time pressure!

Find a real trusted Lawyer or working partner………….preferably one you have already worked with, or someone you know can recommend.

Seek advice and guidance from all the resources you can find and filter, and then filter again, the data for your needs.

Go to Brazil and see for yourself. Place a small piece of business with your selected “partner” and work only on successes

Never try to outsmart the Brazilian Tax Office Bureaucrats. They will win!

Move Slowly, and at your pace

Intellectual Property – Use Patents, but evolve your technology


WHY BRAZIL?


194 Million

A generalized approach to doing business in Emerging Markets

The following approaches are equally applicable to all three countries

THE REALITIES OF DOING BUSINESS IN EMERGING MARKETS

Go back to the Basics……..

Develop a Business Strategy to meet your clients needs and your needs. Include your client in your discussions if at all possible;

Plan out your business approach, develop a “Road Map” and apply all the good business practice you have at your disposal. Segment the approach into three clear phases, Crawl, Walk, Run.

Research the local business environment, the market, your customers needs, your competition, and your managers perspective.

Plan on it taking longer than you expect. Emerging Markets do not work to our Western business, USA Banker or Wall Street Investor, driven schedules.

Seek advice and guidance from all the resources you can find and filter the data for your needs.

Listen to your “Gut Reaction” and go to the country to see for yourself.


Then follow these guidelines:

Do not engage in business that you do not fully understand

Work to define your business model differentiator. Emerging Markets are not “Me-Too” markets.

Do not take marginally profitable work betting that the competition will fail and you can increase margins. The people of these countries will out-wait you.

Plan to work closely with your Client and your local staff. Get engaged!

In a negotiation, get good advice and guidance. Those “unsophisticated” Emerging Market peoples will have us Westerners sliced and diced, if we do not work hard to understand how they operate. e.g.

• Never book return flights or departure dates for the Hotel room• Develop the impression of ‘Infinite Patience’ (Silver Fox)• Really listen for what is not being discussed—It is a problem area and is more important than that which is being

discussed!


Move Slowly, and at your pace

Move Slowly, and at your pace!

Do not be rushed by anyone, particularly not by a company or businessman or woman. A win-win business deal will not evaporate overnight, and if it does, be thankful……… you did not need to be a part of it.

Emerging Markets, and their worth while businesses, are not going to go away tomorrow

Follow a “Crawl--Walk--Run” approach to your business

Get the basics right, build a local Team, then grow in logical steps

If in doubt, get help! The Opportunities are real, but the risk needs to be managed………


Thank you for the Opportunity to talk to you today.

David HemmingsPRA Global [email protected] +1 616 942 5666 (office)+1 616 516 8600 (mobile)www.PRA-Global.com

pra global business development presentation to global business club of mid-michigan

Documents

business reality of

opportunities perspective

chinese people

growth options

people reality of chinaoutline

developed markets

increasing middle class

us companies