Business models in Emerging Markets
VODAFONE’S latest figures appear at first glance to vindicate the most powerful management idea of the past two decades: that firms should expand in fast-growing emerging economies. Sales at the mobile-phone company fell in the rich world while those in the developing world rose smartly. Corporate strategy is usually a contentious subject: there are fierce debates about how big, diversified and financially leveraged firms should be. But geography has seduced everyone. Vodafone is one of countless Western companies that have bet on the developing world.
Look closer, however, and those figures contradict accepted wisdom. At market exchange rates Vodafone’s sales in the emerging world fell, reflecting the widespread currency depreciations in mid-2013, when America’s Federal Reserve signalled it would taper its bond purchases. This drag may linger: in January the lira and rand tumbled in Turkey and South Africa, two biggish markets for Vodafone. On longer-term measures things look cloudy, too. Over a decade Vodafone has invested more than billion in Turkey and India. These operations made a paltry 1% return on capital last year. Vodafone has created a lot of value for its shareholders—but through its American investments, which it has sold to Verizon for a stonking price.
This year Western firms’ giant bet on the emerging world will come under more scrutiny. Most multinationals are far more profitable in emerging markets than Vodafone. American firms made a 12% return on equity in 2012, roughly in line with their global average. But having grown fast, profits are now falling in dollar terms. There has been a long bout of share-price underperformance as investors have lost their euphoria. An index run by Stoxx, a data firm, of Western firms with high emerging-market exposures has lagged the broader S&P 500 index by about 40% over three years (see chart 1). And the recovery in the rich world will mean there will be more competition for resources within firms.
All this will bring strategic questions into sharp relief. Divisional chiefs from Brazil or Asia will no longer get a blank cheque from their boards. Although the average company has prospered, there have been disasters; plenty of firms and some whole industries need a rethink. The emerging-market rush may end up like a giant version of the first internet boom 15 years ago. The broad thrust was right but some big mistakes were made.
The companies suffering a slowdown in profits come in three buckets. Consumer firms including Coca-Cola, Nestlé, Unilever and Procter & Gamble have suffered a gentle weakening in demand and a currency drag. Most are still upbeat about the long term, says Andrew Wood of Sanford C. Bernstein, an analysis firm.
I started with my first 401k, took a bath on
Tech stocks and realized I should apply my knowledge to picking stocks and funds. I knew lots of people who worked for start-ups, making oodles of money when they had absolutely ridiculous business models. I should have linked my first-hand knowledge with my investing.
After the bubble burst, I got better at it. I have made very decent returns betting against the dollar (very heavily invested in foreign funds and emerging markets.) I don't know that a broker could have done better. You have to be careful because they often push things with high commissions for themselves, which can be awful for the investor.
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