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HIGH GROWTH MARKETS Insight and perspective on today’s global economic hot spots

Art of transition North Africa works through the difficult transition to democracy, a new art market emerges in the Gulf and Far East, and lacquer painters in Myanmar wonder if their traditions can survive tourism. Outsourcing R&D No more budget brainpower Strategic alliances The fashionable way into emerging markets Russia joins the WTO Who stands to benefit?


One of the most influential figures in the emerging art world of the Middle East I had launched my company and was traveling a lot, and I had to overcome my ‘Lost In Translation’ feelings by going to galleries and museums. And I began to buy art. A true collector cannot be engineered. Some jump into the art market, hire people to create a collection. They are investors, not collectors. But in time, they might develop a love for art. I encourage them to open their eyes to a wider spectrum of art, avoid what their advisor told them. It’s like a man or woman who marries without love but with calculation – but then, step by step, they fall in love. I am a man who falls in love and then marries! For more on Salsali and the emerging art market in the Gulf and China, see pages 42–45. The painting above is Shirin Neshat (2007) by Egyptian artist Youssef Nabil.

August 2012

venture scene in high-growth markets. The last two years have seen a real surge in tie-ups across all sectors – an important story, as tight credit forces companies to look for new ways of entering emerging markets.

Our feature on page 34

looks at the risks involved in doing business in countries in transition, especially Egypt. The Bahna brothers, of Cairo-based Bahna Engineering, tell us how they defended their business interests during last year’s Arab Spring.



Global briefs 4  Indian slums, retailers in Russia, Brazilian beans 6  Global view Renewable energy 8  Cabling the BRICS, automating the outback, African cities

12  Buying up brainpower The outsourcing of research and development 16  Microsoft’s Asian outpost 19 R&D trends Battelle’s latest forecast

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Growth focus

Alan Buckle Global Deputy Chairman KPMG International


Also in this issue we visit the dynamic joint-

WTO: Russia joins the global trade network p.20


which linked the BRIC nations and others has become less of a common currency, other factors remain that unite them. The rise of middle classes and the spread of wealth, for instance. One startling piece of evidence might be China’s rapidly increasing influence in the rarefied world of art collecting. China’s share of the €46 billion global market for art now stands at about 23 percent. In our cover story on page 42, we look at art investment in high-growth markets, including a profile of Dubai’s go-to guy for contemporary collectors, Ramin Salsali.


But while the furious growth


and the debt crisis in the eurozone are taking their toll on emerging markets. Standard & Poor’s warned in June that India may be the first BRIC nation to lose investment grade status, as industrial output dwindles and growth slows. Faltering growth in India, China, and the United States has also pushed down the prices for commodities – bad news for Brazil, for instance, which depends on them. So after weathering the storm of the 2008 crisis, many emerging markets are facing uncertain futures.

Bridging the gap to emerging markets p.24


A sluggish global recovery

Photos: Cover: Isidora Bojovic pp 2-3: KPMG, Frederic J. Brown/AFP/Getty Images, Isidora Bojovic, Nasser Nasser/AP Photo/ddp images, Sinopix/laif Illustration: KircherBurkhardt Infografik

Questions arise as growth slows

CONTENTS High Growth Markets_August 2012

Art of revolution: Business post-Arab Spring p.34

R&D time: Huawei aims to be number one p.12

Collectors’ item: Ramin Salsali offers a one-stop shop for anyone into emerging art p.45


29  Pharmed out Interview with Adam Schechter of Merck

Off the cuff

20  Russia and the WTO But who are the winners and losers?

31  BRIC IPOs The boom dies down

46  Bancolombia’s Carlos Raúl Yepes on making up for lost time

Business insight

World markets


24  Strategic alliances Joint ventures as a way into new markets

34  Dealing with transition Doing business during a revolution

48  Travel advisory Checking out Chongqing

26  March of the Penguin Joint ventures in book publishing

38 Myanmar Land of opportunity

49  Picture gallery Works from the Salsali Collection

More online

For stories from previous issues, please visit our website, where you will also find more business insight on high-growth markets:

41  Disorderly changes Interview with Hans-Jörg Rudloff 42  The emerging art market High growth in China and the Gulf

50  Emerging Picture Christoph Hein on the charge into Myanmar 51  Key contacts at KPMG worldwide

45  The Dubai collection Profile of Ramin Salsali 3

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GLOBAL BRIEFS Observations, trends, indicators




Argentina exerts oil pressure Efforts by Argentina to advance its claim to the Falkland Islands have moved into financial market regulation. Buenos Aires has written to the London and New York stock exchanges, advising them to demand full information from UK-listed companies exploring in the waters around the British-owned islands – activities Argentina deems “illegal.” Héctor Timerman, Argentine foreign minister, says full disclosure of the activities “and the risks deriving from them” is necessary to ensure investors are informed. Analysts say Argentina is targeting exploration companies and those in related businesses as part of a broader effort to put pressure on London.

The price of oil (per barrel) at which Russia delivers a balanced budget. Russian dependence on earnings from sales of natural resources has increased in recent years. Source: Barclays. GERMANY TAKEOVERS

Mittelstand under attack

Germany’s fabled strata of small and medium-sized businesses is facing challengers from China.


ill Germany’s Mittelstand be eclipsed by intruders from high-growth markets? The question has been occupying analysts of the small and medium-sized businesses that form the backbone of Europe’s biggest economy. Examples include Putzmeister, maker of high-tech concrete boom pumps and a world-class operator. So when news came that Putzmeister was to be bought by Chinese construction equipment giant Sany, alarm bells rang. The Mittelstand’s Waldrich Coburg and Dürkopp Adler are now also in Chinese ownership. “Chinese companies are the most dangerous competitors to Germany,” wrote Herman Simon, a Mittelstand expert on the FT’s beyondbrics blog. “They are most effective in the core sector of German industry such as machinery, engineering, and technology.” Other analysts are less gloomy, saying Mittelstand businesses may need a Chinese partner to remain at the top of their particular class; selling up also offers a means of ensuring continuity for family-owned enterprises where succession is a problem.


Middle Russia goes shopping British retailers target the Putin era’s new spending power.


Hollywood’s happy ending While box office receipts decline at home, Hollywood is increasingly looking to highgrowth markets for a happy ending. Growth from emerging markets helped lift 2011 global box-office revenues by 3 percent to US$32.6 billion. China and Russia lead the charge, says the Motion Picture Association of America. With eight new screens opening every day in China, and officials upping the number of US films that can be screened, the MPAA says the country is “a great opportunity.” Studios such as Dreamworks have already struck jointventure deals in China. Expect more to come.

Retail therapy: British department store group Debenhams joins Marks & Spencer in Moscow.


ack in the Kremlin, Vladimir Putin can contemplate one of the legacies of the 12 years he has ruled Russia as president, prime minister and now, once again, head of state: the emergence of a middle class. It is proving a demanding group. Increasingly vocal lobbying for more political freedoms is already a cause of concern for the Kremlin. On a less confrontational note, the spending power of “middle Russia” – up 16-fold since Putin first entered the Kremlin in 2000 – is a powerful draw for international investors. Latest to get the bug are British retailers such as Debenhams, a department store group, and Hamleys, an iconic toy-seller, which face meager margins back home. They join more established UK retailers such as Marks & Spencer, which entered Russia seven years ago is are busy expanding its operations there. Not everyone is impressed. Alexey Moiseev of VTB Capital warns that too much shopping is increasing the risk of the economy overheating.

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High Growth Markets_August 2012

New, improved: A first-floor dwelling in the Dharavi slum, Mumbai.


User-generated cities of Mumbai Self-improving slums are a response to the failures of official housing policy.

Photos: Simon Dawson/Bloomberg/Getty Images, Toby Melville/Reuters, Corbis, KircherBurkhardt


he idea of slum regeneration might seem laughable. To outside eyes, the physical reality of shantytowns often appears beyond salvation; policymakers – and developers – prefer clearance and redevelopment. Maybe it’s time to reconsider. A recent Mumbai exhibition on slums by architecture and urban-planning students found wider benefits in grassroots selfimprovement. Fieldwork in Dharavi – the biggest of the Mumbai slums that house

half the city’s population – found residents converting from tents and shanties into solid homes in the drive to get themselves more space and privacy. “My brother is getting married … we need extra space for him and his wife,” Rajkumar Nader, a resident who is busy adding another floor to his family home, told the Financial Times. Academics call these “user-generated cities.” Matias Echanove, a founder

of URBZ, a research network involved in the exhibition, sees them as a response to the failure of official housing policy. The emphasis on new-build has, he says, resulted in corruption, shoddy housing, the destruction of communities, and rising crime. This experience is not limited to India. URBZ researchers have visited the favelas of São Paulo where by means of puxadinhos – irregular additions – residents have also been busy upgrading.


Brazil’s unharvested potential

The Emirates currency deal

Ever since the influx of European settlers, foreign farmers have been crucial to the development of Brazilian agriculture. Now that trend faces severe headwinds with a law introduced two years ago to stop foreigners from buying large tracts of land. The intention was to address concerns about Chinese groups buying up farms to secure soybean supplies. But the law’s lack of clarity has stalled all private sector investment – needed if Brazil, already a world leader in some agricultural products, is to realize its potential. Given the scale of Brazil’s farming sector,

China and the United Arab Emirates recently announced a RMB35 billion (US$5.5 billion) currency swap agreement. Aimed at boosting trade and the presence of the renminbi in the Middle East, the three-year deal means that the UAE joins Korea and Argentina in a growing list of countries that can settle bills in renminbi. Analysts say these deals benefit both sides. Countries trading with China get lower transaction costs; Beijing gets enhanced prestige and financial power.

analysts warn that any slowdown in development could impact international commodity prices. Lawmakers are considering modifications that would limit restrictions to particular groups, such as sovereign wealth funds, whereas private deals would be assessed on an individual basis.

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GLOBAL BRIEFS Observations, trends, indicators

Global view: Renewables are part of the solution While credit-strapped economies in developing nations have put their renewable energy policies on the back burner, many emerging nations have put new national energy policies in place. Our chart plots the growth of renewables versus growth of total energy supply from 2005 to 2009.


Why conventional resources remain important.


enewable energy sources for power generation will have an important mission in the BRIC countries. The utilization of agricultural and forestry byproducts must be optimized but not maximized to avoid unintended side effects such as pressure on food prices. Natural resources, such as the energy delivered by rivers, should be harnessed with minimal or even zero impact on the environment – i.e., no reservoirs. Technology advancement will have a crucial role: the cost of photovoltaic cells must reach its minimum to be a commercially viable solution for the hundreds of millions in rural India not connected to the electricity grid. But the BRIC countries’ primary need is baseload electricity, and for the foreseeable future that will come from conventional energy sources, including fossil fuels and nuclear generation. Thus, renewable sources will be part of the solution, but not the entire solution.

Renewables constant in % of global energy supply

WORLDWIDE total primary energy supply rose from 9 million ktoe in 1995 to over 12 million ktoe in 2009. Renewables’ share of that total had not changed. Data here show the breakdown for key nations.







-9,0 1995









BRIC country


United Kingdom

LATIN AMERICA is emerging as a major destination for renewable energy investment, with some US$1 billion in new investment projected for this year. In March, Chile’s LAN airline made the first-ever commercial flight using biofuel.



Next 11 Mature Markets TPES gain 2009 compared to 1995 Share of renewable sources gain 2009 compared to 1995 Data presented on this page comes from information provided by the OECD and the IEA.




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High Growth Markets_August 2012

BRIC states: Where renewables fit in to total energy supply (by ktoe) 250k









Photo: KPMG Infografic: KircherBurkhardt Infografik, Source: © OECD/IEA











100 ’95














Renewable energy sources

















Brazil’s huge sugar-cane crop means it is a top producer of ethanol. A 1970s program to boost ethanol dramatically reduced the consumption of fossil fuels by vehicles. Brazil is also the world’s third largest producer of hydroelectric power. The energy market was liberalized in the late 1990s, and policy now focuses on improving efficiency and boosting renewables.

Russia is one of the world’s largest producers of energy, due to its vast fossil-fuel reserves. This has traditionally thwarted the modernization of renewable sources, such as Russia’s many hydroelectric plants. But now there is an official scheme promoted by the government to boost the share of non-hydroelectric renewable sources to 4.5 percent of total output.

India has an ambitious program to boost solar energy production, largely as a means of serving the estimated 500 million people living in rural areas with no access to electricity. India lacks a national power grid, so decentralized renewable sources of power are a priority. The cost-competitiveness of solar and wind projects has recently improved, encouraging investment.

China is already the world’s top producer of renewable energy, and its largest consumer of solar power. Renewables are a major factor in the development of overall energy policy. An update of its renewable energy law became binding two years ago, largely to speed production of transmission lines, which could not keep up with growth in the renewables sector, and to raise quotas.






CHINA still has a carbon-intensive economy, but is making significant strides in adopting renewable technologies. China has more wind-power capacity than any other country, according to the Wharton School of Business.




Germany +58,7

-8,0 +58,3 +248,2



+130,9 +22,3


+104,0 +26,5







Korea +20,7


Egypt +86,2




INDIA outpaced other nations in investments in clean energy last year, according to Bloomberg New Energy Finance. They jumped to US$10.3 billion, from $6.8 billion in 2010, the fastest rate of growth among all major economies.

















South Africa

More power: Check out KPMG’s 2012 Global Energy Survey and join us for the annual Global Power & Utilities Conference. 7

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GLOBAL BRIEFS Observations, trends, indicators

US $1tr

The amount India must invest in infrastructure over the next 25 years to maintain growth potential and take its place as the world’s third-largest economy. Indian business reckons that poor infrastructure costs the economy US$65 billion per annum. Source: Confederation of Indian Industries.



The 2012 growth target set by the Chinese government. The figure is lower than in recent years, and some analysts think it overly pessimistic. However, it has underscored concern about a slowing Chinese economy and the wider growth prospects of emerging markets.

5.7% African opportunities: Keeping an eye on the future in Dar es Salaam, Tanzania. SUB-SAHARA CITIES

Metropolitan Africa With accelerating urbanization and a fast-growing middle class, many sub-Saharan cities offer enormous investment potential.


oreign investors keen to tap the African growth story should look to the continent’s cities. According to the United Nations, the number of African city dwellers is set to triple between 2010 and 2050 to 1.23 billion – more than the total number currently living on the continent. Urbanization typically brings rising living standards. But, the UN notes, African policy-makers face big challenges to cope with the rush to the cities. Just getting the basics in place – infrastructure, housing, social services – will require massive investment. But this also represents a great business opportunity, according to Frontier Strategy Group (FSG). The consultancy, headquartered in Washington, reckons that African cities offer enormous potential for companies keen on accessing a fast-growing middle class

and hitherto neglected mass market – and prepared to take a risk. But where to go? FSG has drawn up a list of ten cities to watch. Few will be surprised to see Lagos, Accra, Nairobi, Luanda, and Johannesburg among them. Eyebrows may rise, however, on seeing the likes of Addis Ababa, Kinshasa, Dar es Salaam, Ibadan, and Mombasa touted as future commercial hot spots. FSG is particularly impressed by investment from drinks companies Diageo and Heineken in Addis Ababa (Ethiopia) and Kinshasa (DR Congo). Honda’s arrival in Tanzanian capital Dar es Salaam also gets the thumbs-up. Other companies considering taking the plunge might want to hurry. FSG also notes that Chinese companies are making inroads into cities across Africa. (See also High Growth Markets, October 2011.)

The 2012 growth for emerging markets – forecast from Barclays Capital. (For the global economy, the bank forecasts 2012 growth of 3.6 percent.)

6.5% The 2012 growth forecast by government of Indonesia, seen by many as an emerging market to watch.


Net outflow in the six months to April from equity funds invested in Brazil, Russia, India, and China – the original BRIC group of highgrowth markets. The figure reflects a shift in investor sentiment towards other emerging markets. Total EM equity fund inflows for the same period came in at US$12.5 billion.

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High Growth Markets_August 2012


New route for emerging data Emerging market countries are considering an undersea cable to carry data between Russia, China, India, South Africa, and Brazil.


o appreciate the old global economic order, look to the ocean floors. A map of the undersea cables used to transport data around the world demonstrates the historic preeminence of the north and west. That may be about to change. Under bold plans advanced by BRICS Cable, a South African company, the main high-growth markets will get their own undersea cable – a 34,000-kilometer data highway running from Vladivostok in eastern Russia to China, Singapore, India, South Africa, and on to Brazil and Miami. The company says the project – which won support from BRICS leaders at a March summit and is now looking for investors – will put an end to the existing arrangement whereby communications between the BRICS are routed through hubs in Europe and the United States, resulting in higher costs. But is there more to it? A new cable, says the company, would remove “the risk of potential interception of critical financial and security information by non-BRICS entities.”

The Aussie mining belt: Soon to be populated by robots. AUSTRALIA LABOR COSTS

Photos: Panos Pictures/VISUM, Ian Waldie/Bloomberg/Getty Images, Getty Images

Automating the outback Australia has profited massively from the growth of China. Hunger for commodities has given the “lucky country” an economic boom – and a labor-cost headache. Miners are shelling out huge sums for skilled and raw muscle, with six-figure salaries luring workers from around the world. Now in a bid to cut wage bills – or, as one executive puts it, “help address significant skills shortages” – miners are deploying a familiar business practice in remarkable fashion: automation. Across the Aussie mining belt, driverless trucks and trains are being deployed, or planned, by companies such as Rio Tinto. The only human touch will be far away from the coalface in airconditioned control centers.

Cable vision: No longer must BRICS data go round the long way.


Bank idea receives good vibrations A recent summit considered the proposal of a common development bank.


he developing world may have missed the chance to get its nominee into the top slot at the World Bank – the job went, as ever, to a US candidate. But the prospect of a bigger voice for emerging markets in development banking remains very much on the agenda. At a BRICS summit in New Delhi in March, the participant nations – Brazil, Russia, India, China, and South Africa – considered a proposal for a common development bank to finance projects and encourage trade. A

working group is now looking into the idea, originally put forward by India. If it takes off, the bank could offer China a means to bolster the role of its currency in international trade and finance. As an institution, it would also give the BRICS countries a more formal character. Some might see all this – a vehicle for a reserve currency to challenge the dollar, the establishment of a big new development bank – as a challenge to the financial order crafted by the West after the Sec-

ond World War. But Kaushik Basu, chief economic adviser to India’s finance ministry, says such fears are misplaced, as the global economy is large enough to accommodate more than one big development bank. “There is space for much more. Indeed, there is need for much more,” he told India’s Business Standard. Basu added that the idea had been discussed with officials of both the World Bank and the International Monetary Fund and “received good vibrations.” 9

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GROWTH FOCUS Arrested development? Will “reshoring” be the new outsourcing? p.12 The Haidian zone Fortune 500 companies in China’s Silicon Valley p.14 Early adopter Microsoft’s Chinese R&D operation p.16 Future shock The West is still best, says Battelle’s Martin Grueber p.19

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Photo: Dirk Kruell/laif

Welcome to your new R&D department For decades, Western companies have been outsourcing R&D operations to make the most of budget brainpower in countries such as China and India. But now that brainpower is no longer so attractively priced...

Around half of the 44,000 employees of China’s Huawei, a leading telecoms supplier, are engaged in R&D.

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GROWTH FOCUS Research & Development

Screen team: Chinese company Huawei sets its sights on becoming the world’s number one telecoms provider by the year 2020.

Overseas research and development


Must-read: Raise your Asia IQ with the Invest in China app and publication from KPMG.

ven a profound slowdown in the West can’t stop this juggernaut. As the developed world continues to struggle with recession and tight credit, companies in emerging markets continue to boost their research and development operations by exploiting cheap brainpower and bouncy consumer demand. The seeds were sown decades ago but only started to blossom in the 1990s. This new frontier is crowded with a Who’s Who of multinationals, from engineering giant ABB to telecoms upstart ZTE. One of the pioneers was Microsoft, which maintains an ever-expanding, wildly innovative research lab outside Beijing (see profile p.16). After 2000, this trickle of R&D globalization turned into a flood, descending on China and India and to a lesser extent Brazil, Russia, South Africa, and diverse up-and-comers. At the same time, emerging market companies are now R&D forces to be reckoned with. Chinese company Huawei, for instance, has sights on becoming the world’s number one telecoms provider by 2020. Polycentric innovation, meanwhile, is all the rage. For instance, GE opened an innovation center in Bangalore, India – the same hub where Cisco set up a second headquarters for its “globally integrated” enterprise. Conventional wisdom: When the developed world sneezes, emerging markets catch a cold. But how much have Western sniffles affected its R&D activity elsewhere? Not as much as you might think, according to Martin Grueber, lead

researcher at the Ohio-based Battelle organization. Low costs and an abundance of market opportunities have outweighed economic hurdles. “The economic downturn caused a deeper level of thought regarding R&D investment in general and its expected outcomes – whether it is from a corporate or government perspective,” says Grueber. According to the 2012 Battelle/ R&D Magazine Global Funding Forecast, an annual report on investment trends in the sector, US and European firms made significant investments in R&D activities in China, India, and other emerging markets even during the downturn (see interview p.19). For companies and national economies alike, the 2007 credit crunch stimulated an interest in developing an infrastructure of innovation, during and coming out of the global slump.


Photos: Sinopix/laif, Atlantide Phototravel/Corbis, Huang Jianhua/Xinhua Press/Corbis, AP/ddp images

The days when the West was the wellspring of innovation, and emerging economies merely provided the cheap labor, are long gone. For the selective investor in corporate R&D, opportunities abound despite recent overheating, particularly in China and India. Jeremy Gray reports.

age growth, always a concern in hotmoney areas of the emerging world, has been most rampant in China. Labor costs there have soared by 20 percent per year over the past four years, according to the International Labour Organization. Not surprisingly, when the American Chamber of Commerce in Shanghai asked members about their biggest challenges, nine-tenths put rising costs at the top of the list. A case in point: some 230,000 people work at Foxconn, one of the largest factory complexes in China and the most important contract manufacturer for Apple. Earlier this year, Apple agreed > 

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High Growth Markets_August 2012

Urban development: Shenzhen is home to some of China’s biggest R&D spenders.

Seeing stars at a trade fair in Shenzhen’s F518 Idea Land (left); robot wars at the International Digital Technology EXPO in Qujiang.


GROWTH FOCUS Research & Development Procter & Gamble Through 2015, consumer-goods maker Procter & Gamble plans to invest US$1 billion in China, its second-largest market worldwide.

The Silicon Valley of China

Zhongguancun Science & Technology Zone is a sprawling high-tech archipelago of seven science parks, scattered across Beijing. Some fifty Fortune 500 companies have locations in one of these: the Haidian Science Park.



Haidian Science Park

5 km 5 km

Forbidden City

Zhongguancun Science Park


Forbidden City

Innovation cluster: The science parks of Zhongguancun, a household name in China, host more than 12,000 high-tech enterprises employing around half a million technicians.

Infografic: KircherBurkhardt Infografik


ABB Demand has been brisk in both China and India for ABB’s factory automation and electricity transmission equipment.

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France Telecom has partnered with China Telecom, the world’s largest fixed-line operator, to extend the reach of its Orange mobile network.

Bosch Some of the Chinese cars being imported into Europe use components made by Bosch, the big German parts supplier.

Toyota aims to sell one million cars in China this year, a sevenfold increase since 2005.

Microsoft was among the first Western corporations to establish a major research center in China.

Canon Spiraling Chinese wages have prompted Canon to spread its operations into Vietnam, a lower-cost neighbor.

SK Group South Korea’s thirdbiggest conglomerate opened the first foreign-owned filling stations in China in 2005.

Cisco Computer networking giant Cisco faces some of its toughest competition yet from China’s Huawei.

Samsung Producing in China since 1992, Samsung now holds the country’s biggest market share for smartphones and televisions.

Philips The company first opened its doors in China during the 1920s, and delivered an X-ray machine for the emperor’s personal use.

Siemens Technology transfer remains an important way to access China’s markets. A Siemens-built high-speed train connects Beijing and Tianjin. 15

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GROWTH FOCUS Research & Development

Open to the future: Microsoft CEO Steve Ballmer at Zhongguancun.

Microsoft first on the block

Microsoft was one of the first software companies to set up in China. Its R&D facility in Zhongguancun now attracts the very best talent in the business. And when you eventually see an app which can record any language and translate it back to you in any other language, it probably will have been developed here. By Jeremy Gray.


icrosoft Research Asia is about as successful as you can get in the R&D business. Opened in 1998, the facility is now the company’s largest research lab outside the United States, even emulating the open layout of company headquarters in Redmond, Washington. Because it is ever expanding, its innovations exert an increasing pull on the mother ship. The setting is Zhongguancun, China’s Silicon Valley. This location was a sleepy farming village only two decades ago, but has evolved into a gleaming innovation hub with multinational corporations, hundreds of start-ups, and super-malls bristling with electronics. Google, Intel, Sony, and Oracle are just down the road. Microsoft founder Bill Gates is feted like a movie star whenever he visits here. If you are an ambitious Chinese programmer, MSRA is where you want to be. So it’s no surprise that the nearly 300 researchers at MSRA are among the brainiest in the business. MSRA focuses on user interfaces, multimedia, data-intensive operations, and, increasingly, the white-hot areas

of online search, advertisements, and cloud computing. Research from Beijing has flowed into cutting-edge products such as Xbox, Microsoft’s video game console; Kinect, a motion-sensor for hands-free applications; and a universal speech-recognition translator which is still in the works. Rick Rashid, Microsoft’s vice president for research, says many solutions dreamed up at the company’s Asian hub turn out to be widely applicable, thanks partly to its creative distance from Redmond. Researchers are given plenty of freedom to pursue their own projects in what the company describes as “fundamental, curiosity-driven research.” “Every researcher should be given the opportunity to surprise,” says HsiaoWuen Hon, managing director of the center since 2007. “We know that some time, somewhere, some kid will surprise us with the next big thing, and hopefully that kid will be at Microsoft Research Asia.” A certain percentage of projects will always fail, but if you know the outcome before every action is taken, Hon adds, “that is not research but product development.”

The company synonymous with the Windows operating system has pursued this hands-off approach to research since 1991, when Rashid was recruited from Carnegie Mellon University to run Microsoft Research. In fact, the separation of “R” from “D” dates back to American industrial policy of the 1940s, and propelled the likes of Bell Labs, IBM, and Xerox to stardom. However, this is an increasingly rare – and some say outdated – approach to corporate research. As cost-cutting pressures have mounted, tech giants have pushed their researchers to focus on practical ideas that are likely to reap a financial payoff.


on is careful to emphasize that Microsoft is a “results-driven organization.” Projects with few prospects of an outcome within a few years are doled out to senior researchers, while junior colleagues prove themselves on less risky efforts. R&D no longer appears to be a guarantee of bottomline success, however. Microsoft’s R&D outlays amount to roughly 13 percent of annual revenues, while at Apple the figure was last at only 3 percent.

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High Growth Markets_August 2012

Photos: ChinaFotoPress/Getty Images, Photoshot, Wilfried Maisy/REA/laif

to raise the salaries of its Foxconn employees by up to 25 percent. With the profit margins of the Shenzhen-based company at only 1.5 percent, and those at Apple around 30 percent, it is obvious who will shoulder most of the extra costs. In India, meanwhile, salaries increased between 10 and 15 percent at the country’s 700 R&D centers last year, while attrition among employees was as high as 20 percent, according to Zinnov Management Consulting. Although these factors fed into higher operational costs, “the mood at the R&D centers of global companies in India has not dampened,” says C.S. Chandramouli, director of Zinnov’s globalization advisory business in Bangalore. The running costs of multinational R&D centers in India were still 25 percent lower than those in China. Thanks to ad hoc measures such as capital controls, and to a tightening in national interest rates, inflation has eased in most other emerging markets. Still, employers can expect to pay more for qualified R&D labor in countries such as Brazil, Mexico, Turkey, and Russia. A handful of Chinese companies have been splashing out on R&D, sometimes with remarkable results. Huawei, the Shenzhen-based telecommunications company, is among the world’s top five applicants for international patents, and may overtake Ericsson this year as the number one supplier of telecoms equipment worldwide. Huawei has encountered opposition in its push to expand in the United States, amid allegations of shady business practices, patent infringements and national security concerns. Its founder and president, Ren Zhengfei, used to work for the Chinese People’s Liberation Army. All this hasn’t stopped Huawei from developing the fastest smartphone on the planet, or from pursuing its patent battles with neighboring mobile-phone maker ZTE, which has muscled to the fore with sexy lines of consumer products.

improvements on existing patents. Although the Chinese government pours money into R&D, much of it is wasted, according to the OECD.


he Industrial Research Institute, an R&D think tank in Arlington, Virginia, found in its latest annual survey of 104 multinationals that a full 70 percent have R&D facilities overseas. China topped the roster, and India and Brazil made the top ten. That list of R&D destinations is only getting longer, especially in Asia, South America, and eastern Europe. The biggest concerns mentioned by R&D managers had to do with innovation: accelerating innovation, growing the business through innovation, and balancing short- and long-term R&D objectives. According to Richard Antcliff, chief > 

A recent survey of 104 multinationals found that 70% of them have R&D facilities overseas.

Globally integrated research is on the menu at Cisco’s campus in Bangalore, India.


imilar to other multinationals, these Chinese companies are generating and developing knowledge by means of a global R&D infrastructure. Another good example is Lenovo, which has leapfrogged Dell and Acer to become the world’s second-largest PC maker. Originally incorporated in Hong Kong, Lenovo keeps its headquarters in North Carolina but maintains most of its production in China. China appears to have become an R&D powerhouse. Last year the number of patents in China outpaced those in Japan, putting China in second place behind the US. Since 2000, the number of trademarks registered in China has jumped more than four-fold, according to a survey by Thomson Reuters. Curiously, Chinese companies have been slow to register their patents globally, and a closer look suggests that many registrations are in fact small

Saris and IT services at Infosys’s state-of-the-art Bangalore headquarters. 17

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GROWTH FOCUS Research & Development

Big names that are actively involved in “reshoring” include Boeing, Ford, and GE.

technologist at NASA’s Langley Research Center, “These responses show a continued concern for getting innovation management right.” Managers, it seems, are feeling the pressure of markets and the need to tap a growing pool of local talent on a global scale. In-house diplomacy plays a growing part, as it has become vital to prove the value of innovation to senior managers, and then find the right balance of investments for technology and innovation, Antcliff adds.


ould this mean that the big outsourcing boom is over? Hardly. More mobile, more nuanced is the response of the multinationals. In markets where rising labor costs are testing corporate budgets, some companies have

been opting for greener pastures in countries such as Bangladesh, Cambodia, Indonesia, and Vietnam. Nike used to make the bulk of its sports shoes in China, but has shifted most production to Vietnam, taking its local R&D along. Rather than expand product development in China, Samsung has decided to build a new R&D center in Hanoi, where it will hire up to two thousand product engineers by 2015. There are other companies now returning operations to their home countries, or refraining from relocating in the first place. A string of studies found that many American manufacturing executives are now planning or considering moving production out of China. Big names actively engaged in “reshoring” include Boeing, Ford, and GE. Electronics giant Philips recently announced it would bring production of its top-line electric razors from China to the Dutch town of Drachten, citing wage costs and a nearness to its home R&D base. “A product engineer in Shanghai is now just as expensive as in Drachten,” says Rob Karsmakers, a factory manager who spent four years working for Philips in Asia. Some European companies remain cautious. As rising wages lifted demand for automated factory gear, KUKA, the largest European maker of industrial robots, decided to build a regional hub in China. Although this location will become its Asia center of assembly, R&D and most production will remain in its native Germany, says Till Reuter, KUKA’s chief executive.


Marching into Vietnam, where Nike has established both production and R&D.

Reshoring: Philips has brought electric razor production back from China to the Netherlands.

eanwhile, the R&D craze in India continues apace. Revenues from India’s IT and outsourcing industries are expected to top US$100 billion this year, up 15 percent from 2011 and double the level of 2007, according to the National Association of Software and Services Companies (NASSCOM), India’s technology industry association. Japan’s Panasonic, Denmark’s Vestas, and Red Hat of the US were but a few of the multinationals to open major technology R&D centers in India over the past 18 months. “There has been consistent growth in the domestic IT market,” says Rajendra Pawar, chairman of NASSCOM, which has 1,200 member companies. This trend was thanks to growth in India and expansion into new regions such as the Middle East and Africa, and comes despite weak economies in its key markets of the US and Europe. Pawar adds that crises stemming from the wobbly euro and Western banks had “affected governments more than companies,” at least in their dealings with India. A recent survey by Duke University seems to confirm this view, showing that less than 5 percent of American companies are considering moving work from India to another country.

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High Growth Markets_August 2012

Supercomputer: China’sTianhe 1-A computer is among the fastest in the world. IBM’s Sequoia took the top slot in June.

Why the West remains an R&D powerhouse Developed economies still rule research and development, explains Martin Grueber, research leader of the Technology Partnership Practice at R&D giant Battelle. By Jeremy Gray.


Photos: Daniel GROSHONG/laif, dpa Picture-Alliance, The New York Times/Redux/laif, KPMG

s the R&D outsourcing boom by Western companies in China and India over? If we’re talking simply about outsourcing for lower-cost R&D talent, then I wouldn’t say it is totally over, but it will be increasingly difficult for Western companies to justify solely on cost advantages. However, R&D driven by the unique markets and market access requirements will continue and expand for the foreseeable future, since they likely have a different cost model.

until they truly compare with US or other developed-country costs.

What about the R&D track record of Chinese-owned companies? Most recent patents seem to cover minor changes on existing designs. A lot is made regarding the level of Chinese innovation and its incremental nature. However, its overall innovation quality is rapidly improving. These improvements are coming from a better understanding of the global innovation landscape and direct government efforts to enhance their intellectual property and With wage costs up sharply in China, patent processes as well as the rigor is local brainpower still cheap enough of their academic research. Not surprisfor international firms? ingly, it will take some time for its innoCurrently, the cost advantage within vation infrastructure to match the size China for R&D talent still exists and will of its research investments. But as their for a number of years. However, given internal innovation infrastructure is being the time it takes to set up active and enhanced to more global standards, their engaged research programs, at the rate recent growth in measurable innovation at which China’s wage costs are increasshouldn’t be dismissed. For example, in ing it becomes more and more difficult 2000 there were 274 patents registered for new entrants. Those firms that have to Chinese inventors by the US Patent already sunk the start-up costs will likely and Trademark Office. Sixty-six of them take advantage of the lower wage costs were assigned to purely Chinese companies. In 2011, the number of US patents Martin Grueber is co-author registered to a Chiof the Battelle/R&D Magazine nese inventor was Global R&D Funding Forecast. 5,003, with 51 percent Columbus, Ohio-based Batof these assigned to telle, a charitable trust, is one a Chinese company or of the world’s largest indepenorganization. While these dent R&D organizations, with numbers are extremely 22,000 employees at some small compared to the total 130 locations. number of US patents, it is

Martin Grueber

spectacular growth with a lot of “incremental change” being captured by Chinese companies. Does the slowdown in R&D spending in the United States mean Asia now has the keys to the future? Not at all. We show that at current growth rates China’s level of R&D investment will equal that of the US in about 2022. But a lot can happen over the next decade in terms of the global economy, R&D, and technology in general. While the growth in China is significant for many reasons, the US R&D engine is still more than twice the size of China’s, and is more than that of China, Japan, and South Korea combined. What are the strongest R&D growth areas in emerging economies? In the near future, ICT will continue to be the strongest area for growth, especially as it continues to move to even lower-cost areas. China will also continue to gain traction in the life sciences with increasing government and multinational investment. One potential R&D niche for these emerging countries is supplying technologies needed to meet their dramatic economic and consumer growth which also have future applicability in Africa and other developing economies. For example, pushing the envelope on wireless communications, low-cost biopharmaceuticals, distributed power, and even desalination technologies. These technologies help grow and sustain their own consumer economies, while positioning them extremely well in other developing countries. 19

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OPINION Russia and the WTO

No pain, no gain Chicken farmers and retailers in Russia are not particularly delighted about joining the World Trade Organization. But this is more about trade lanes and infrastructure and getting a bigger slice of global commerce, says Ben Aris.


WTO to attract international retailers, ith ratification of the though. Russia is already a top Euroagreement for Ruspean consumer market, worth $649 bilsia to join the World lion in 2011, according to the Ministry Trade Organization, of Finance; it grew 7.2 percent year-onit becomes the last year, when most of the rest of the develmajor economy to join the planet’s preoped world is in recession. (See also mier trade club. But some are already page 4, Middle Russia goes shopping) asking who will get the most out of this Foreign producers have made a string deal – Russians or foreign investors? of high-profile deals, starting with Depends on your perspective. In PepsiCo’s US$3.8 billion acquisition of the short term, by making imports leading dairy producer Wimm-Bill-Dann. cheaper and easier, it will hurt the RusForeign manufacturers have also sian economy more than it will help. benefited in strategic sectors, but the But the Kremlin was careful to negoticoncessions are being made on the ate a phased accession that lends the Kremlin’s terms. The Kremlin has used weakest sectors some protection over the seven-year exemption to WTO rules the next seven years, allowing them to to force foreign manufacturers to accelrestructure before they are hit by the full erate their commitment to Russia. force of unfettered trade. Foreign investors, on the other hand, win from day one. In joining the WTO, ive of the major international carthe Kremlin has made a number of conmakers have made investment cessions that will significantly increase pledges that will exempt them competition from foreign investors in from high non-WTO imports duties in nearly all sectors of the economy. exchange for dramatically increasing In the short term, benefits for Russia their output and sourcing 60 percent of are also marginal. Because Russia is pritheir components domestically. Foreign marily a commodities exporter, the govcar production jumped by 90 percent in ernment says it will earn just US$2 bilthe first quarter, reports Rosstat. lion extra from reduced tariffs. At the The Kremlin has had an easier time same time, billions of dollars’ worth of protecting national interests in the finannew imports will hit the Russian market. cial sector. The financial crisis has cut So the Kremlin appears to have ceded bank-asset growth in half to 20 percent, much of the domestic consumer market which has significantly increased comto importers. But the bet is that importpetition. The four biggest state-owned ers will quickly turn into producers with banks, including Sberbank and VTB local facilities, bringing Bank, already badly needed technology dominate the and management. sector. So The Kremlin’s commany late arrivmitment to allowing als in Russia, Ben Aris has been covering more foreign compesuch as HSBC Russia since 1993. He fountition is clearest in and Barclays, ded Moscow-based portal retail, as 100 percent have sold their Business New Europe, was foreign-owned subretail arms and Moscow bureau chief for sidiaries will be scaled back their the Daily Telegraph, and has allowed to open operations. contributed to Euromoney forthwith. Still, even here and The Banker. More of his Russia didn’t the Kremlin has conreporting at: need to join the ceded that 100 percent

foreign-owned banks will be allowed to operate in Russia in the future, something it has resisted for years. This will allow them to tap their parents’ cheap financing. The Kremlin has kept a cap on foreign-bank assets in the sector at 50 percent (it is about 25 percent at the moment), but foreign insurance companies will be able to open fully-owned branches without restriction, although only nine years after accession. The biggest change will be in agriculture. Development is a high priority for the Kremlin. Agriculture import tariffs will be cut from 13.2 percent to

Ben Aris



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High Growth Markets_August 2012

Illustration: KircherBurkhardt Infografik


ussia is already a major export destination for European producers and has attracted significant foreign investment. Local producers have been complaining about the impending competition. But that’s the point, and it is working. Leading producers, particularly of pork and poultry, are rushing to build new factories. Analysts expect production to double over the next eight years, although profitability will fall as prices come down. Russia’s biggest payoff will come from the more basic aim of WTO membership: bolstering trade so member countries can make more of their com-

parative advantages. In Russia, that advantage is clearly its geography. Globalization means international trade has been exploding over the last decade or so. The total volume of global trade in 1990 was equivalent to 39 percent of global GDP, but that has shot up dramatically to 61 percent in 2010 and will probably top 84 percent by 2030. That’s according to a recent report issued by Citibank. Global trade volumes are expected to grow from US$37 trillion in 2010 to US$371 trillion in 2050, according to a

report by Goldman Sachs. And Russia finds itself in the middle of the EuropeAsia trade corridor – the fastest-growing of the planet’s supply lines. So the big picture behind Russia’s inclusion in the WTO is in the end as much about logistics as import duties. The Kremlin has increased investment in infrastructure, which has gone from US$7 billion in 1999 to US$100 billion a year since 2008. That will continue until 2015. Investing in Russia’s burgeoning transport role is where the most opportunities will be in the coming decade.



10.8 percent, but products in which Russia is trying to become self-sufficient, such as poultry and pork, are exempt from WTO compliance for eight years.







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BUSINESS INSIGHT Howdy partners! Strategic alliances in emerging markets p.24 By the book Penguin’s publishing joint-ventures p.26 Emerging pharma Q&A with Merck’s Adam Schechter p.29 IPOs in EMs Have the glory days now come to an end? p.30


Photos: ddp images/AP

Reaching the streets in emerging markets Since the financial crisis of 2008, Western companies are increasingly turning to joint ventures and strategic partnerships as the most efficient way to enter high-growth economies.

Alliance: US white-goods maker Whirlpool has made a deal for “preferential access� to Suning stores in 300 Chinese cities.



Fashionable: Clothes by British designer Sir Paul Smith (left) re-enter China (right) via a partnership with Hong Kong-based ImagineX.

Why strategic alliances are now in fashion The lackluster recovery in the United States and Europe, combined with the ongoing global bank crisis, has upped the ante for strategic alliances and joint ventures with fast-growing businesses in emerging markets. By Pan Kwan Yuk.


Keeping track: KPMG’s Emerging Markets International Acquisition Tracker (EMIAT) shows where the money is coming from, and headed to.

ergers and acquisitions have been the obvious route for recession-ravaged Western companies looking to capture shares in the high-growth economies of Brazil, Russia, India, and China, as well as newer economies throughout Asia, the Middle East, and Africa. But with bank credit more expensive and difficult to come by following the global financial crisis in 2008, companies are taking a harder look at the effectiveness of buying their way into emerging markets. Instead, the recent trend has increasingly been for Western companies to turn to joint ventures and strategic alliances for the purposes of entering hard-to-penetrate emerging markets and developing non-organic growth. Although joint-venture activity has declined in the wake of the global financial crisis, the last two years have seen a resurgence of such tie-ups across all sectors, including retail, pharmaceuticals, telecommunications, banking, oil and gas, and even book publishing (see story page 26). This spring alone, British fashion brand Paul Smith set about re-entering China through a partnership with Hong Kong-based ImagineX – five

years after losses forced the brand to retreat from the country. Elsewhere, General Electric linked up with Shanghai-listed XD Electric to sell equipment for power transmission and distribution in China and around the world; Renault-Nissan formed a joint venture with Russian Technologies, the state industrial conglomerate, to hold a 74.5 percent stake in AvtoVaz, Russia’s oldest and biggest auto manufacturer; and Nestlé, the Swiss food group, announced plans to invest more than CHF5.3 million (US$5.7 million) in Morocco to boost its milk collection and production. “Most companies in an ideal world would want a controlling deal and buy 100 percent of a company – that is typically their default position,” says Paul McNicholl of the Linklaters law firm in London. “But in recent years, a number of factors have prompted more clients to come to us and ask for a different route to doing deals in emerging markets and not just straight M&A.”


ne obvious factor is regulation. In some cases, limitations on foreign ownership make alliances the only route into emerging markets. Foreign single-brand retailers, for example, are allowed to operate in India

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High Growth Markets_August 2012

only through a 50/50 joint venture with an Indian company. Foreign multibrand retailers are barred from setting up shop in India altogether in order to protect the country’s local players – including its estimated 12 million “mom and pop” shops. “A joint venture is mandatory to build cars in China,” says Aaron Lo, a partner in KPMG in China. “So it is a balancing act between gaining share and not giving too much away.” Maybe not something investors would do by choice. But both the lackluster pace of economic recovery in the United States and Europe and the ongoing global banking crisis have also done much to accelerate the trend.

Photos: Panos Pictures/VISUM, Bloomberg Collection/Getty Images, KOMMERSANT PHOTO AGENCY/action press


luggish recovery is forcing an ever greater number of Western companies to look beyond their traditional stomping-grounds and focus on emerging and frontier markets as sources of growth. This in turn has been driving up the premiums that companies now have to pay for a controlling-stake deal in emerging markets. Meanwhile, the liquidity squeeze has meant finding financing for any such deal has become more complicated and expensive. “As the cost of doing an outright acquisition has become more challenging, more companies are seeing sub–100 percent joint-venture deals as a sensible way to gain a foothold in a country with a smaller up-front cost,” says McNicholl. Precise figures for joint ventures between Western and emerging-market companies are hard to come by simply because no one tracks them. But data from mergermarket on foreign direct investment in emerging markets by Western companies, and data from Dealogic on joint ventures in emerging markets suggest that the trend is rising. There were 220 joint ventures, worth US$12.1 billion, in emerging markets last year, according to Dealogic. While this figure represents a slight decline from the US$15.5 billion recorded in 2010, it remains the second best year on record for emerging-market joint ventures and is over double the US$5.2 billion recorded for 2000. Not surprisingly, China, whose fast-growing retail and consumer markets have had Western retailers salivating, topped the list of destination countries for joint ventures. The world’s second-largest economy led the pack for all but one year between 2004 and 2011. While the Dealogic data do not indicate who is doing the joint ventures in emerging markets (Western companies or other emergingmarket companies), foreign direct investment data from mergermarket provide a clue. From a mere US$17 billion in 2002, FDI in emerging markets from Western companies hit US$105 billion in 2007. The figure fell to US$35.7 billion in 2009 in the wake of the global financial crisis but bounced back to hit US$71.4 billion last year.

If you plot mergermarket’s data against those from Dealogic, you will see that the flow of FDI from Western companies into emerging markets has broadly tracked the rise and fall of joint ventures in emerging markets.


Targeted joint ventures in emerging markets, 2011 China Brazil Chile 19.5

Russian Federation Others 36.3

estern interest in emerging-market joint ventures can only grow as com5.8 panies pursue further cost reduction % and renew their focus on growth, especially in emerging markets, according to cross-border 9.8 M&A specialists. “Compared with acquisitions, joint ventures provide an appealing way to accel28.6 Source: Dealogic erate entry into a new market with fewer financial or reputational risks than going at it alone,” says Federico Membrillera, head of corporate FDI into emerging markets finance at Delta Partners, a telecoms, media, and from western companies technology consultancy in Dubai. “Also, joint Value in US$bn 120 ventures promote knowledge exchange and innovation while they allow the joint-venture partners 100 to focus on their core competencies.” 80 The bookkeeping of joint ventures also 60 remains convincing. In the case of telecoms, 40 Membrillera reckons a successful alliance has the 20 potential to achieve a 1 to 4 percent increase in 0 revenue, a 4 to 6 percent decrease in operating ’03 ’05 ’07 ’09 ’11 expenses, and a 5 to 9 percent increase in capital- Source: mergermarket expenditure optimization. In retail, the case for partnering up with a local company is particularly strong. It can often > 

Putin at AvtoVaz: Russia’s oldest automaker is now in a joint venture with Renault-Nissan. 25

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Penguin’s classic joint venture scheme Why iconic titles by Western writers are available in Chinese and Korean and soon will be in Arabic, too. Report by Pan Kwan Yuk.


an money be made selling copies of Gulliver’s Travels and Don Quixote to the Arabic-speaking world? Penguin, the famous paperback book publisher, seems to think so. In November 2010, the group struck a deal with Egypt-based publisher Dar El Shorouk to bring its classic literature titles to the Middle East. Under the terms of the deal, each year twelve translations of Penguin Classics, such as Robert Louis Stevenson’s The Strange Case of Dr. Jekyll and Mr. Hyde, will be published in Arabic, and up to eight local Arabic titles will be published in English. Proceeds from the sales will be split between the two publishers. John Makinson, Penguin chairman and CEO, says the Shorouk-Penguin project opens new horizons for cultural cooperation and will add substantially to the number of quality translations between Arabic and English. “The partnership with Dar El Shorouk represents a significant landmark in Penguin’s 77-year history,” he says. “It is not just between two celebrated publishing houses but between two of the broadest and deepest literary cultures in the world. There is potentially a very large audience for classic literature in the Arab-speaking world and a rich seam of classic Arabic writing that we intend to tap into.” Ibrahim El Moallem, chairman of Shorouk, says the alliance is a win-win deal. “The Shorouk-Penguin venture represents a milestone in Shorouk’s history and an important step for Arabic publishing,” he says. “We look forward to opening a new window for our readers on the world’s classics. We are also delighted with the opportunity to offer some great Arabic classics to the rest of the world.” Penguin has sold books almost exclusively in English for most of its 77-year

King Penguin: CEO John Makinson has struck partnership deals in Egypt, China, and Korea.

history. But like companies in other sectors, Penguin is faced with sluggish economies in Europe and the United States and is hopeful about emerging markets. In many countries, rising levels of education and wealth are boosting publishing and the media.


akinson says the decision to expand Penguin Classics into non-English markets is not “the start of a grand foreign-language strategy.” But it does give the publisher a foothold in high-growth markets where economic growth and demographic shifts have been driving book sales. “These are important but early-stage products in markets that offer huge opportunities for growth,” Makinson told the Wall Street Journal. Looking ahead, Penguin will continue to focus on bringing classics to foreign-language markets “with a growth story” outside western Europe, he added.


he agreement with Shorouk follows a series of similar deals that have been struck in Brazil, China, and South Korea. In Brazil, Penguin teamed up with local publisher Companhia das Letras in August 2010. The eight titles released have sold 49,300 copies at cover prices ranging from 15 to 35 reals. The best seller was Machiavelli’s The Prince, released in a new Portuguese translation ahead of Brazil’s election, with a foreword by former president Fernando Henrique Cardoso. Penguin began selling its Classics in translation in China at the end of 2007 and in Korea in 2008, partnering with local publishing houses. In China, Penguin has released thirty titles, with ten more slated to debut next spring. In Korea, the company has sold 400,000 copies of its 90 available titles, the most popular of which is F. Scott Fitzgerald’s The Curious Case of Benjamin Button and Other Jazz Age Stories.

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Photos: David Levene/eyevine/Intertopics, Joao Marcos Rosa/Nitro

High Growth Markets_August 2012

be a quicker and more cost-effective way for a Western multinational to distribute its goods in a country compared to the hard work of building up its own network from scratch. This was the logic behind US home-appliance maker Whirlpool’s decision earlier this year to form a sales and distribution alliance with Chinese retailer Suning Appliance. The deal, aimed at boosting Whirlpool’s small share of China’s burgeoning white-goods market, will see the world’s largest maker of washers and refrigerators get “preferential access” to 1,700 Suning stores in nearly 300 cities across China. In return, Suning will get exclusive rights to Whirlpool products, according to Ian Lee, vice president of North Asia at Whirlpool. “China is not the easiest market to work in,” says Lee. “It is one of the most competitive markets in the whole world. It is also a very big country. Every province is like a single country. For us to build a presence across China, we would have to do it one city at a time, and this would have involved building customer services, infrastructure, logistics, all of which are very costly and labor-intensive. Suning has a presence in every province and offers a cost-effective way to expand and accelerate our reach in the country.” Similarly, when US clothing retailer The Gap decided to step up its overseas presence in places such as Panama, South Africa, Lebanon, Georgia, and Azerbaijan, it did so through franchise partnerships. “Gap’s entry into these smaller countries is low risk and high return because they are not going in there and building bricks-and-mortar stores themselves,” says Richard Jaffe of financial services company Stifel Nicolaus. “Rather, they are doing it through a franchise agreement with a local partner. In return, Gap can leverage its brand name and promote its e-commerce presence. It’s lucrative and costs Gap nothing.” In other sectors, partnerships and joint ventures are also becoming more focused on addressing a specific need, such as gaining access to new technology, collaborating on research and development, or tapping into a pool of highly skilled workers for less money.

ufacture, and sell generic drugs in China and on the global market. “It’s a way to access our partner’s portfolio and tap into local manufacturing and distribution capacity,” says Petra Danielsohn-Weil, head of strategy for Pfizer’s emerging-markets business.


or local companies in emerging markets, alliances can be an attractive means to learn from their bigger and more established foreign peers. In some cases, it might also be the only way – short of selling the company outright – to survive once the home market has

For companies in emerging markets, alliances are a way to learn from their more established foreign peers. > 


he looming expiration of US patent protection on top-selling drugs such as Plavix, a blood-thinner, has sent companies in the pharmaceuticals industry scrambling to diversify their income streams. Earlier this February, Merck announced a partnership with two Brazilian drugmakers, Supera Farma Laboratórios and Eurofarma, to sell and distribute its drugs in Brazil. The same month, Pfizer announced that it had entered into a framework agreement with China’s Zhejiang Hisun Pharmaceutical, a leading producer of active pharmaceutical ingredients, to establish a joint venture to develop, man-

Shelf life in Belo Horizonte: Merck has partnerships with two Brazilian drugmakers. 27

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Emerging Markets Targeted Joint-Ventures

Number of Deals 200 150 100 50 0






Source: Dealogic

opened to new entrants bringing global brands or technology. Yet in spite of the rise in popularity of joint ventures between emerging-market and global companies, and their apparent win-win character, there remain many drawbacks to such alliances. Given the substantial differences in scale, company cultures (including governance), and strategic interests, they are often harder to pull off. This is especially true given that most global companies are considerably larger than their emerging-market partners.


ee from Whirlpool says although the US company entered China in 1994, it went through a number of unsuccessful partnerships with local companies before it finally found the right ones. In addition to Suning, which handles distribution, the company has a manufacturing joint venture in China with Hisense Kelon

Electrical Holdings. “Joint ventures between emerging-market and Western companies present their own risks and challenges,” says McNicholl of Linklaters. “Ultimately, joint ventures that fail do so because the commercial interests of the two parties are no longer aligned. “The advantage of finding a local partner is to mitigate the local country risks,” he continues. “But at the same time companies and markets evolve. All is fine if neither companies are competing against one another, but it gets more complicated, for example, when the local partner starts applying know-how from their jointventure partner companies and starts making products that compete directly against them.” Something of the sort appeared to have been the case with Danone, the French food group. In 2009, the company quit its joint venture with Hangzhou Wahaha, China’s leading drinks group, following more than two years of legal battles. Danone and Wahaha used their joint venture, created in 1996, to develop many of China’s top drinks brands; up until the dispute it was seen as one of the most successful in China. But the relationship soured in 2007 after Danone accused Wahaha and Zong Qinghou, the Chinese company’s founder, of setting up a lucrative parallel operation that bottled and sold the same drinks as the joint venture did.


Minding the gap: Strategic partnerships mean that Western brands are present in China both online and on the shelves.

aking sure that the commercial interests of both parties are continuously aligned is a constant balancing act. As an example, take Paul Smith’s re-entry into China. Spencer Leung, a UBS analyst, points out that fashion joint ventures often run into trouble for lack of advertising spending. “Foreign brands like to venture into China with the help of a local partner, but the two sides often disagree on who should bear the cost of promoting the brand,” he told the Financial Times. “Given the short-term nature of most joint ventures in China, local partners hesitate to put their own money into advertising a brand owned by someone else. As a result, brands don’t get advertised enough in a market where they are not familiar to consumers, and they fail.” And as companies in emerging markets get bigger and more confident, they are increasingly likely to want to set their own rules for alliances with Western partners, including doing the picking and choosing themselves. That was the message of an announcement last year by Wahaha in China. The drinks group said it was now looking for a wide range of international partnerships in areas ranging from product sourcing to green manufacturing methods in a bid to diversify its sales revenue and deal with quality problems in the national supply chain. Pan Kwan Yuk is an emerging-markets reporter for the Financial Times, based in New York City.

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Local partners vital to growth at Merck Merck, known outside North America as MSD, is one of the world’s largest pharma companies. Adam Schechter, its president of Global Human Health, talks about alliances in high-growth markets with Pan Kwan Yuk. While we continue to build our own Global mission: Merck provides medicines, vaccines, and other pharmaceutical products in over 140 countries. capabilities, we are also actively to creating partnerships that work for all engaging regional and local partners in parties involved. many areas, including manufacturing, sales, marketing, and R&D. Can you speak about your recent deal with two Brazilian drugmakers? What Does Merck have a unified approach was the rationale behind the alliance? to alliances? Earlier this year, Merck announced the Each opportunity is different, and we formation of a joint venture with Supera approach each situation with an assessFarma Laboratórios S.A., a Brazilian pharment of what is best for the business in maceutical company co-owned by Crisa given market or region. While an acquitália and Eurofarma. Within this new sition might make sense in a given situjoint venture, called Supera RX, Merck ation, joint ventures and partnerships will partner to distribute and sell a portallow for a combination of expertise – folio of innovative pharmaceutical and both local and global – which allows branded generic products solely in the Merck to share its strengths with comDo you favor joint ventures over Brazilian retail sector. The initial portfopanies that are vested in a particular acquisitions? lio will include approximately 30 products area or have established products, Business development is an important across a range of therapeutic areas. The relationships, or local expertise from element of our strategy globally, includjoint venture will have its own dedicated which we can build. Co-promotion and ing in emerging markets. We find that sales force separate from Merck, Crisco-marketing, distribution, and other leveraging global and local expertise tália, and Eurofarma, and will also leversales and manufacturing arrangements through partnerships and joint ventures, age the parent companies’ infrastrucare also important. Our joint ventures and sometimes acquisitions, helps us to tures for activities such as sales force in Brazil, China, and India, as well as improve patient access and drive strong training. Each of the parent companies local manufacturing partnerships in Brabusiness results – it has to be right for maintains a separate business in Brazil. zil, Russia, China, Korea, South Africa, that market and that business – and supThis joint venture will give Merck addiand Saudi Arabia, are examples of the port our mission and growth strategy. tional local expertise, an expanded portmomentum we’ve sustained in these folio of products, and a strong distribution network. markets as we increase our reach, Why was doing a partnership preferaexpand manufacturExecutive vice president at ble to acquiring a Brazilian drugmaker? ing capabilities and Merck and president, Global With our colleagues in Brazil, we felt that supply chains, and Human Health, at Merck & Co., a joint venture would allow for an optimal become more flexible Inc., Schechter was formerly combination of expertise and capability, to meet local market president of Global Pharrequirements and grow maceuticals and integration both local and global, which will allow our business. We also officer at Merck & Co., Inc. us to collectively increase patient access increase the number of He was also president of US to medicines in Brazil, while we work to partners who can speak to Human Health from 2006–07. build upon local relationships and grow how committed Merck is our business. Where do emerging markets fit into Merck’s global business? Our emerging-market strategy is a key element of our company’s growth strategy and our mission to improve healthcare globally. We are expanding with our current product portfolio, new product launches, and branded generics, including Merck’s diversified brands. Merck already has a significant presence in key emerging markets, including Brazil, Russia, India, China, South Korea, Turkey, and Mexico, and we are committed to continue to grow our emerging-markets businesses. In each of these markets, we are focused on long-term growth, building on scientific innovation.

Photos: AP/ddp images(2), Merck(2)

Adam Schechter

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No laughing matter: Brazil’s Bovespa index is down 11 percent since the start of 2011.

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High Growth Markets_August 2012

The IPO bust in emerging markets For the past three years, emerging markets, led by China, have outpaced developed countries in equity fundraising. But is the IPO boom coming to an end? Pan Kwan Yuk reports.


ast year, companies from the four BRIC nations – Brazil, Russia, India, and China (including Hong Kong) – raised a combined US$74.2 billion through new shares issues compared to US$37.2 billion and US$37.9 billion raised respectively by companies from Europe and the United States, according to figures from Dealogic. This comes after a blockbuster 2010, when BRIC IPOs hit US$148.6 billion, nearly twice the combined amount raised by their European and American counterparts. But what goes up, must come down – at least a bit. Burned by the poor stock performance of some of the companies in emerging markets that did go public, and wearied perhaps by signs that growth in countries such as China and Brazil is softening, international investors were proving reluctant to line up for new share offerings in the early part of this year, preferring instead to put their money into safer assets such as bonds or currencies, which offered a better return.

Photos: Bloomberg Collection/Getty Images


s of the end of April 2012, companies from BRIC countries had raised just US$10.3 billion this year. That’s a 69 percent drop on 2011. By contrast, European and American companies have managed to raise US$13.5 billion – a mere 50 percent decline from last year. In many respects, the story of IPOs in emerging markets this year is the story of global markets, which have been hammered by fears surrounding the eurozone’s festering debt crisis, a weak recovery in the United States, and concerns that China may still face a hard landing after years of breakneck expansion.

Emerging-market bourses have not been immune from the sell-off that began last summer and gathered pace during the third quarter. Brazil’s Bovespa and Hong Kong’s Hang Seng indices are both down 11 percent since the start of 2011; the Shanghai Composite is down 16 percent. Among emerging-market equities investors, the feeling can be summed up as follows: Why buy into an IPO when there are plenty of opportunities among alreadylisted companies? “Volatility slows everything down because it makes it harder to price the shares,” says one growth markets analyst based in New York.


f investors are finding better opportunities elsewhere, companies too are discovering the allures of fundraising through other channels, such as the bond market. Both Asia and Latin America debt issuance are at a record high. “With core government bond yields so low, it makes sense for companies to raise debt and lock in low yields,” says Philip Poole, head of investment strategy for HSBC Global Asset Management. “Relative to Western companies, many emerging corporates are under-levered and have room to borrow,” says Poole. “By contrast, emerging stock markets are trading on cheap valuations – China and Russia, for example. This is a buying opportunity for investors but makes equity fundraising less attractive for corporate issuers.” While it’s too early to say whether we are seeing a sustained global swing in equity fundraising away from emerging markets and back to the West, the data from Dealogic do make a sobering read. In Brazil, where Edemir Pinto, the stock exchange chief, once boldly declared

that Brazilian IPOs will raise more than 55 billion reals (US$35 billion) for the whole of 2011, the reality was rather different. The year ended with just US$4.4 billion raised. And the new IPO season has gotten off to less than a flying start. Only two companies have come to the market so far: Locamerica, a car rental company, and BTG Pactual, Brazil’s answer to Goldman Sachs. Russia has had just one deal. And China, while raising US$7.7 billion via 90 deals, still suffered a 72 percent drop in the amount raised. General market conditions aside, Chinese IPOs have not been helped by the wave of accounting scandals involving companies such as Sino-Forest, which burned a US$460 million hole in John Paulson’s hedge fund last year.


ontrast this with the US, which has managed to nab several high-profile listings, including Facebook’s controversial offering in May. Despite the current sluggishness of the IPO market, many insiders remain bullish on the long-term prospects for equity markets in emerging economies, particularly in Asia. The thinking is that as middle classes grow in these economies, they will prefer to buy goods and services from local companies that are more successful than giant multinationals at building local brands and operating efficiently. These companies will need to raise capital. One consultancy has identified some three thousand companies around the world that say they are contemplating an IPO within the next two years. About half of them are from emerging markets.

Pan Kwan Yuk is a New York-based emergingmarkets reporter for the Financial Times.

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WORLD MARKETS Troubled investments Surviving the post-Arab Spring p.34 Myanmar Time for a change p.38 No smooth transition Interview: Hans-Jörg Rudloff p.41 Emerging art New artists, new market p.42 Salsali Eye in Dubai p.45

The art of dealing with revolution Photo: AP/ddp images

Uprisings are sudden, as in Egypt, or the slow burn that was Myanmar. But when politics subside, new leaders get down to business, creating opportunties to balance the risks. Our status report, with an unusual cultural twist.

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Marching towards the future in Cairo. Children goofing around in front of a political mural while the nation was gripped by strikes in February this year.


WORLD MARKETS Countries in transition

Troubled investments ”They demanded money, didn’t get it, then stole our main gate to sell as scrap metal.”


unisia, February 2011. The curfew in place since President Zine alAbidine Ben Ali fled the country on January 14 has just been lifted, but protests continue, and the interim government is about to fall. In Egypt the curfew is still ongoing, and euphoria reigns. It is two weeks since President Hosni Mubarak was forced out of power, the military has taken control, and

Volunteers: Members of NGO Tadawo Association in Cairo meet to discuss aid projects.

Fighting form: Engineer George Bahna (right) has interests throughout North Africa.

in virtually every workplace there are protests for higher wages and management changes. In Benghazi, in eastern Libya, an insurrection has started. The regime of Colonel Muammar Gaddafi is deploying tanks and heavy artillery to retake the city, and a bloodbath is expected. From their vast apartment in central Cairo, Paul and George Bahna are putting out fires in these three countries. Their family firm, Bahna Engineering, operates across the region as a subcontractor to heavy industry and construction projects. In Egypt their chief client is Ezz Steel, the country’s largest steel producer. They work on multiple facilities, and have projects in the pipeline for the next few years, as Ezz Steel is in expansion mode. Or at least it was. CEO Ahmed Ezz, a close political ally of Gamal Mubarak, the former president’s son, has been arrested and some of the company’s accounts frozen. Meanwhile in Libya, the Bahna brothers’ main contact in a railroad project has mysteriously vanished. “In Libya, you needed a regime connection to do business,” explains Paul Bahna. “The man we worked with was a longtime companion of Gaddafi’s. As the uprising began in the East, we heard our man went to see Gaddafi and urge him to negotiate with protestors... It devolved into an argument, and reports got back to us that in the middle of the discussion, Khamis Gaddafi, one of the Libyan leader’s sons, pulled out a gun and just shot him dead.”


Photos: Ann Hermes/The Christian Science Monitor/Getty Images, Peter Menzel/Agentur Focus, Khaled Desouki/AFP Collection/Getty Images

Putting up with political turmoil has become a fact of life for many entrepreneurs looking for high-growth markets. An overview from North Africa by Issandr El Amrani.

he Bahna brothers’ Egyptian operations also suffered in the lawlessness that followed the uprising and the collapse of the police state. A Bahna Engineering facility for metal processing near Suez had trouble with Bedouin tribes from nearby Sinai. “One day the youth of the local tribe would come and claim the land our facility is on is theirs,” remembers George Bahna. “They demanded money, and when they didn’t get it, they just began taking our equipment… they even stole our main gate to sell as scrap metal.” The experiences of the Bahna brothers may be extreme, but they are typical for many investors caught up in the Arab Spring. Revolutions are not good for business, at least at first. They are messy, disrupt established orders, generate violence and legal uncertainty. The assets of former rulers and their cronies, often key players in the economy, get frozen or nationalized. The transition periods that follow the initial uprising, > 

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High Growth Markets_August 2012

Holding high expectations: Protests have become a daily part of life in Egypt, but these men celebrate the sentencing of Hosni Mubarak. 35

WORLD MARKETS Countries in transition

Aftermath: Kids playing on a deserted tank in Misrata, Libya, scene of fierce battles in the war to topple the country‘s strongman and his regime.

even if order is slowly being restored, are often just as chaotic. It took six months and several cabinet shuffles for Tunisia’s interim government to stabilize under the premiership of Beji Caid el Sebsi. Libya’s precarious government still has only hazy control over much of the country. Egypt has gone through several prime ministers and ministers of finance since the fall of Mubarak, and now has, in Mohammed Mursi, the unknown quantity of a new, Islamist president. In all three countries, protests initially directed at dictators have metamorphosed into a million revolts, with even private sector workers seizing the opportunity to demand a better deal.


aher Gargour lived through it all at his factory near Alexandria, in northern Egypt. As deputy CEO of Lecico, a manufacturer of toilets and sinks, he employs several thousand workers. During the revolution, many of them joined the call for a general strike, and afterwards went on strike for higher wages.

One of the protest movement’s initial demands was to increase the minimum wage, especially in the public sector, which employs some seven million Egyptians. Whereas an average monthly salary for an unskilled worker might be EGP600 (about US$100), there are now calls for increases to more than double that. For investors like Gargour, the issue was not so much increasing salaries as knowing where the demands would stop. “The strikes were chaotic, without leadership. I had dozens of people tugging at my shirt, trying to get my attention,” he remembers. “And when I thought we negotiated a compromise, it would start up again, with new unrealistic demands.” This experience will be familiar to many businessmen operating in Egypt, where expectations raised by revolution provoked an explosion of demands – some more reasonable than others. Although following the election of Mohammed Mursi, the government implemented a 15 percent increase in public sector wages, much remains unresolved, and companies have often simply had to deal with their workers directly. As

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High Growth Markets_August 2012

unemployment surged on account of the drop in tourism and disruptions in business, private sector workers afraid of losing their jobs negotiated with their employers. Gargour also says that capital controls that were put in place by the Central Bank of Egypt made moving money, even between the company’s international offices, much more difficult – another common complaint. As a result, Lecico had a tough 2011. Its yearon-year profits dropped by 72 percent, not just because of disruptions to production but also because one of its main export markets, Libya, was engulfed in civil war. Yet Lecico has crawled back. In early May, when the company unveiled its results for the first quarter of 2012, profits were inching back up, with a 33 percent increase in sales due to the return of the Libyan market and the revival of Egypt’s construction sector, and a 2 percent increase in year-on-year profit. “We are beginning to see what we hope will be a strong recovery from the difficulties of last year,” says Lecico CEO Gilbert Gargour.

powers, made things only a little clearer. Investors, meanwhile, are eager not to miss the right As the chaos moment to come back to the market. that followed the Looking at Egypt’s balance of payments sheet, the hemorrhage is clear. According to EFG uprisings subsides, Hermes, in 2010 FDI reached US$6.3 billion; in a cautious optimism 2011 it was actually negative at minus US$483 million. Portfolio investment went from a prevails. US$10.8 billion surplus to a US$10.4 billion loss. Most investors are waiting to see how the political situation unfolds, and whether the Egyptian pound – stoutly defended by Egypt’s central bank at a cost of some US$20 billion, or 57 percent of reserves – will be devalued. Another signpost is whether Egypt comes to an agreement with the IMF on a US$3.5 billion loan. The IMF deal will be a signal to other lenders, from Arab Gulf states to the G8. David Butter, a Middle East economic analyst, says many are watching Egypt closely. “The finance ministry says that Egypt’s record in letting the outflows happen in 2011 and in 2008–09 > 

Photos: Theodor Barth/laif, Holly Pickett/Redux/laif, Denis Dailleux/VU/laif


s the chaos following the uprisings subsides, a similar cautious optimism prevails even in some of the sectors most affected by the political unrest. In Egypt, no part of the economy was more upturned by the change in regime than real estate, because of the widespread perception (and, in part, the reality) of massive corruption in the sector. Companies like Palm Hills Developments – majority-owned by the families of Mubarak’s housing and transport ministers, who have fled the country – have had to face countless lawsuits and investigations into their acquisition of government land at extremely cheap prices. Several transactions in the sector have been reversed already, particularly when they involved companies that were amassing a vast land bank but intended to resell the land rather than develop it. Simon Kitchen, head of research at Egypt’s biggest investment bank, EFG Hermes – itself a recent target by Qatar Invest, the first major acquisition in the financial sector since the revolution – says the plethora of lawsuits filed in the name of fighting corruption has the air of a witch hunt. “Apart from the effect these investigations are having on individual companies, they are making investors domestic and foreign very nervous,” he says. “They don’t know the rules of the game.”

Shopping, Muslim-style: Would a non-secular leader in Egypt embrace Western business?


efore the military disbanded Egypt’s elected parliament in June, it was hoped the outlook and economic policies of the first permanent government would be known by summer. The late June election of Muslim Brotherhood candidate Mohammed Mursi as president, with the military retaining some significant

Palm beach: Upmarket housing estate north of Cairo, far removed from downtown protests. 37

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Democracy: Aung San Suu Kyi campaigns in Myanmar’s recent elections.

Myanmar reaches for the future The easing of sanctions and the rapid opening of Myanmar have driven a rush of investor interest in a nation with substantial energy and mineral reserves. Gwen Robinson reports.


series of key economic and political reforms launched by President Thein Sein and optimistic IMF growth forecasts of 6 percent or more this year give the impression of a reforming Myanmar joining the league of highgrowth markets. US investment guru Jim Rogers hails “an astonishing opportunity,” saying, “If I could put all my money into Myanmar, I would.” Rogers may have to wait a bit longer. The United States has eased sanctions, but the move was limited to the lifting of some travel bans, asset freezes, and restrictions on financial transactions. American officials have said it could take over a year to ease substantive curbs, which still ban direct investment by US companies. At the same time, the rush to examine opportunities in the resources sector, telecoms, tourism, construction, and medical equipment has already prompted critics to warn of “over-investment” in a country still struggling to introduce basic investor protection and regulatory frameworks. Vikram Nehru, a former World Bank chief economist, warns that rushed development could be counterproductive. “A big risk is that you can have mac-

roeconomic instability and the desire, for example, to liberalize too rapidly.” Moody’s has said debt forgiveness, the removal of sanctions, and continued reform were “credit positives.” Myanmar, however, remains unrated. Moody’s also warned of “negatives,” including inadequate infrastructure, a fragile banking sector, weak rule of law, and a history of high inflation. Nehru, also, warned of deep-rooted problems including excessive licensing and controls that “suffocate private initiative and breed corruption,” as well as tariff and non-tariff barriers that inhibit trade. The question is who to believe. Can Myanmar live up to the hype?


rucial advice comes from U Than Lwin, vice chairman of KBZ Bank. With laws covering banking, insurance, and foreign exchange all being amended, he suggests foreign investors exercise restraint until they are complete. This spring, vital laws on land use, labor, and pensions were passed. In the fine-tuning stage are a foreign investment law with big incentives, including eight-year tax exemptions; more liberal provisions on land leases; and a green light for foreign companies to set

up on their own. Other ongoing reforms include new banking regulations, steps to develop capital markets, and a new law on special economic zones. But the most critical reform has been the managed float of the currency, the kyat, and a push to unify its many exchange rates. The central bank sets a daily reference rate which has hovered around the starting rate of Kt818 to the dollar – far from the previous official rate of Kt6.4. The official rate was widely blamed for gross distortions in the economy and government accounts. Foreign and local companies are already vying to overhaul Myanmar’s telephone network, and other fields will open rapidly to investment. The first beneficiary is the Yangon property market, which saw prices surge on an influx of money. In Yangon’s elite Golden Valley area, houses are selling for US$2 million or more. Elsewhere, the costs of hotel rooms and office space have soared. But the most important reform, say many analysts, is the most daunting: to overhaul the entire legal system and institute a full rule of law. A commission reviewing the country’s legal framework says at least 400 bills are required. In the “new Myanmar,” that may take some time.

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High Growth Markets_August 2012

means that the relationships with foreign financial investors remain healthy,” he says. “A lot of the Egypt carry-trade and treasury-bill investors have been back to have a look in the past few months, and they will probably come back in sooner or later because Egyptian treasury bills are giving attractive yields; but they have reservations about the political mess, the clouds over the IMF deal, and about exchange-rate risk.” An American fund manager who regularly visits the country says he is interested to come back but is still waiting. “There has to be a devaluation,” he says, “and the problem is that we still don’t know whether we’ll have a government and central bank willing to make that unpopular decision.” Overall, portfolio investors say that most Western financial institutions are staying clear of the government debt market for now, and only cautiously investing in equity. Most of the foreigners putting their money in the Egyptian market are from the Gulf Cooperation Council states, and it’s expected that political support from liquidity-rich countries such as Saudi Arabia and Qatar will be translated into FDI, stock market investments, and increased buying of government debt.

Photos: The New York Times/Redux/laif, apaimages/Polaris/laif


here was one shining exception. The Swedish company Electrolux had been preparing, in late 2010, to acquire whitegoods manufacturer Olympic Group, which has a 30 percent market share in Egypt. The deal was frozen as the uprising began in January 2011, but the company decided to go ahead with the US$480 million acquisition in July 2011 – a rare showcase of FDI during a tumultuous year. “At the moment the situation might be difficult in Egypt, and there will probably be a bumpy road ahead for some time,” says Erik Zsiga, Electrolux’s media relations director. “But Electrolux believes Egypt and the region is an increasingly important market over time. It has a young population that will soon create new households in need of refrigerators, ovens, washing machines, and other appliances.” Ultimately it is this simple long-term calculation that is bringing back investors. The Arab world is overwhelmingly young – in a country like Egypt or Libya, some 60 percent of the population is under 30. The same young men and women who led the uprisings will soon be getting jobs, settling down, forming homes, and hopefully getting the prosperity and democracy they felt the old regimes had denied them. The policies of future governments will be crucial in determining how fast these investors come back. Future elections, to the extent they take place, will bring new parties or coalitions into power, and while everyone is promising growth and social justice, delivering in a fiscally responsible way is another matter.

Electrolux believes Egypt and the region is an increasingly important market over time.

In Libya, which can rely on petroleum exports, there is already a boom as rebuilding takes place, which presents opportunities for its eastern and western neighbors, traditional providers of services and labor. “Egypt has an opportunity to cash in on Libya’s economic renaissance,” says Butter, the economic analyst. Hundreds of thousands of Egyptian economic migrants have already returned to Libya to look for jobs not available at home.


ut domestically, for Egypt, the government serving until the controversial election of June served with caution, postponing major new spending programs. As for Libya, Butter says, “there are plenty of opportunities in just about any sector, but very little solid legal or financial infrastructure to build on.” For Egypt, Libya, and Tunisia, much now depends on how quickly political divides can be bridged so that governments are formed that can tackle urgently needed reforms with legitimacy. Libya’s election for a Public National Conference will act as a constituent assembly and build a basic constitutional framework from scratch after over 42 years of one-man rule. The challenge for Libya is to ensure that the vast resources from oil revenue are spent wisely and accountably, and that the contradictions between Libya’s geographical political divisions and the reality that the central government controls much of the oil income are resolved. Tunisia is already ahead in all this, with a new constitution expected to be presented to a popular referendum early next year. New general elections will follow that could deliver a different result than the current coalition government of Islamists and secularists. And in Egypt, > 

All for one: Egyptian women demonstrate that they have voted at a poll station in May. 39

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WORLD MARKETS Countries in transition

The European Bank for Reconstruction and Development plans to spend €7.5 billion a year in North Africa.

where Islamists did well in initial parliamentary elections, the ultimate outcome of this summer’s messy and at first inconclusive elections and the future role of the military will be crucial to both the constitution-writing process and the government in Cairo’s ability to deal with a pressing economic crisis.


ne interesting outcome of the political upheaval is that, in Tunisia and Egypt, pro-business Islamist movements have emerged as the strongest. Both Tunisia’s Ennahda and Egypt’s Muslim Brotherhood have elaborated programs based on encouraging free trade and boosting entrepreneurship. In Egypt, for instance, the Muslim Brotherhood said that prior to elections it was preparing to improve the legislative

environment for Islamic banking and other religiously sanctioned forms of investment, and that it would revive Mubarak-era programs such as public-private partnerships (PPP) to attract foreign investors to infrastructure projects. “We want to have a new PPP law, and favor investments that are done through vehicles that are Islamically correct, like sukuk [Islamic bonds],” says Amr Abou-Zeid, a management consultant who advises the Muslim Brothers’ economic policy team. Such vehicles are likely to attract investment from the Gulf first, but Western companies are also interested. “I’m ready to lend money now,” says the managing director of the local subsidiary of a major European bank. “But I need a government that gives me clarity. There are too many projects frozen since the revolution, and for no good reason.” Reform of subsidies has also been high on the agenda. In 2011, the Egyptian government spent US$12 billion subsidizing energy. “We need to target subsidies better,” Abou-Zeid says. “We can’t keep on subsidizing fuel for people like me who can afford to fill their tanks, or energyintensive industries that have been getting their natural gas at cost.” Now a series of reforming measures are in place, including an EGP25 billion cut in subsidy relating to petroleum products.

S Opening doors: BMW produces about three thousand cars a year in Egypt.

Money talks: Egyptian telco Mobinil has attracted interest from foreign investors.

uch reforms might be crucial to fix the delays in payment that the Ministry of Petroleum has accumulated to upstream companies operating in the country, for long the major part of Egypt’s FDI. Progress on projects such as BP’s US$10 billion, ten-year investment plan on Egypt’s north coast will be key signs of improvement in the investment climate. In the meantime, there are some institutional investors lining up to invest in the region. The European Bank for Reconstruction and Development is planning to spend €7.5 billion annually within a few years in North Africa and Jordan. It already announced in April a US$1 billion fund to boost the recovery of the region’s economies, and will begin disbursing funds in September. That is a rare commitment from Western nations, which at an May 2011 G8 meeting in Deauville, France, promised over US$80 billion but failed to pay out. Concern about homegrown problems, such as the eurozone crisis, may have dampened enthusiasm for a Middle Eastern Marshall Plan. Likewise, Gulf states promised investment funds and aid worth some US$16 billion, but have delivered only a few billion dollars thus far. And most of that was for buying treasury bills to support government borrowing. Revolutions may be bad for business, but investors remain cautious during transitions too.

Issandr El Amrani is a blogger, journalist, and commentator based in Cairo.

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The phases of economic transition

Rapid changes are always disorderly, says a top investment banker. Then they get better.

H Photos: Peter Macdiarmid/Getty Images, Shawn Baldwin/Bloomberg/Getty Images, Vladimir Weiss/Bloomberg/Getty Images

ans-Jörg Rudloff is chairman of Barclays Capital, the international investment bank. He has held the position since 1998, following earlier top boardroom roles at Credit Suisse and Novartis. After the collapse of communism, Swiss-born Rudloff was an early mover into the transition economies of central and eastern Europe. He is also a vice chairman of Russia’s Rosneft. When did you first get into emerging markets? With the end of the Soviet Union and the transition of the Eastern bloc, it was only logical that an investment bank would be interested to do business there. It was the victory of one political and economic system over another, and it opened the world. At the time I was chairman of Credit Suisse First Boston, and our main business was in OECD countries. When we opened offices in Prague, Budapest, and so on, people declared us silly and mad. But we were always at the cutting edge in the type of banking we did. The move into emerging markets was extremely exciting. It is still exciting. What lessons have you learned? Initially, every rapid transition will be disorderly, full of problems, full of contradictions – where you are living under both the old and new systems. In Russia, this happened in the 1990s. Then comes an orderly phase – in Russia when Putin became president in 2000 – that creates confidence for investors. In Russia this phase ended in 2008; since then we have had consolidation. We need a new phase to carry us further ahead. Looking forward, what are the prospects for emerging markets? It’s always tricky to talk about emerging markets in general. Each has its own outlook. What I would say is that at a

time when banks are de-leveraging, capital doesn’t flow as freely as it used to. This matters because the growth prospects of these Insider: Rudloff markets depend on opened offices investment and an for Credit Suisse First Boston in ample supply of capieastern Europe. tal to make up for the lack of internal savings. So they suffer from more restrictive credit conditions. But the positive, long-term case remains, and much of the tightening was anticipated. We are in for a longer consolidation period. So what does this mean for investors? Not so much. Businesses have to look at the long term. They have to be positioned in these huge markets, not look at the short term. Consolidation means lower growth, not recession. There is lots of potential as long as political will and free flow of capital are guaranteed. In Russia, what does the “change” in leadership mean? Now we have an “old-new” president, and it will be interesting to see who the new team will be. The sooner the uncertainty about the direction of travel is removed, the more dynamic the economy will develop. After the crisis of 2008 and particularly over the last year, Russia seemed to be in paralysis. That might have had to do with elections. It might have to do with stagnation of commodity prices: it is one thing when you go from US$30 oil to US$120; it’s another when you stay at US$120. Business seems tired and lacking in impulse. What should investors watch out for? We don’t know what the policies will be. A lot of contradictory statements are

made. It will be a while before we can judge the effectiveness. The areas to watch are anticorruption, any opening up of the political system, and greater participation. All would be a sign of a new beginning that you need for a sense of excitement. People expect a lot of action from leaders. It’s a major task, particularly at a time when, for all the emerging markets, the period of crony capitalism is coming to an end. We have seen it with the revolutions in the Middle East, and it will spread. There is a clear desire to make the economy work for all the people, not just elites. That wind is blowing across the emerging markets. In Russia, privatization – a genuine move to public ownership – will be key. But they remain challenging places to do business, don’t they? It goes without saying that you are in a different environment, where things such as legal certainty are not guaranteed. You can’t go into these markets without taking risks; you have to build that into your expectations. So you need good domestic and local experience. The scale is also different. So you don’t rush in. You go in, and you build, and you know that it will be a long road. It needs a lot of judgement and good understanding. That takes a while, and you will have setbacks. But one day you will get rewarded. 41

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WORLD MARKETS Art in Emerging Markets

New art makes its mark

Emerging markets have arrived big-time on the global art collecting and investing scene. Arsalan Mohammad describes where the action is, and what’s driving it, from Dubai to Shanghai. “The joy is that younger artists are coming up who are still very affordable.”


conomic growth in the Middle and Far East has, over the past decade, seen a steady shift of financial power to new territories and markets, from established bases in struggling Western economies. And the global art market – once concentrated in London, New York, and Paris – has followed suit. Today – driven by new waves of artists, dealers, and collectors – freshly minted art industries thrive in the Gulf region, India, and, most dramatically, in China. These new art markets have demonstrated an intriguing East-West symbiosis. In the Gulf,

India, and China, global art-business staples such as dynamic gallery spaces, art fairs, and biennials, have seen the world’s new art players filtering local artistic traditions, cultural heritage, and contemporary global influences into unique products. And, conversely, the savviest names in international art have been quietly making inroads into these new markets for some years now. Top collectors and influential tastemakers such as Charles Saatchi and Larry Gagosian have opened up rich seams of attractive, investmentfriendly art for a new breed of local and international collector.

42 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

High Growth Markets_August 2012

A visitor to the UCCA gallery in Beijing contemplates a sculpture which would have seemed out of place ten years ago.


The first wave of growth was seen in India prior to 2008, fueled by new middle-class prosperity in cities such as Delhi, Mumbai, and Bangalore. Art funds such as Osian’s – speculative investment packages aimed at first-time or novice collectors – enticed thousands of investors to sink money against estimated future increases in art portfolios. But after the 2008 crash, there were spectacular losses all round, with key funds struggling to repay investors. Commentators blamed market overheating on hyped artworks and oscillating prices, caused by an influx of speculators. “It was an artificial hype,” says Neha Kirpal, founder and director of the India Art Fair, the latest iteration of which saw Indian art prices begin to creep back up. “Prices are more leveled now,” she adds. The swings and roundabouts of the contemporary Indian art market have provided a salutary lesson for the Gulf. There, a decade of growth in cultural infrastructure has seen state invest-

ith such renowned local collectors as Samawi, Sultan Sooud al Qassemi of Sharjah, Iranian contemporary art specialist Dr. Farhad Farjam, and businessman Ramin Salsali (see page 45) all exhibiting their collections in private museums and gallery spaces, the culture of art investment has been maturing rapidly. Yet, while Arab modernists continue to command top prices, recent recession-friendly trends, such as introducing new and untested contemporary artists at bargain prices, have ensured that the lower and middle depths of the local market remain buoyant. As Antonia Carver, director of Art Dubai, an international art fair, points out, “The joy of this market is that there are younger artists coming up who are very affordable, given that they’ve mainly worked in cities that are off the global art radar.” She continues, “And the new Asian/Middle Eastern art centers give them visibility and exposure. Then there are the superstars, often now seen as ‘international’ rather than ‘Middle Eastern.’ So there are entry points for new collectors as well as the more seasoned.” Carver reckons that the maturing of the collecting market means local collectors are moving from the safety of regional Arab and Iranian art into Western and Far Eastern markets, while increasing numbers of foreign investors are attracted to the region by entry-level prices.

Chinese artist Ai Weiwei is a darling of the western media but is treated as a threat by the authorities at home.

Painting by Zeng Fanzhi up for auction at Christie‘s in Hong Kong.


Photos: REX FEATURES LTD./action press, Ai Weiwei, Zeng Fanzhi/ Michelle Rosenfeld Gallery, Mu Boyan/Aye Gallery

ment – from colossal museum complexes such as Mathaf in Qatar and planned branches of the Guggenheim and Louvre in Abu Dhabi – contrast with a rapid expansion of private galleries and art spaces in Dubai. And despite its own economic woes, Dubai’s position as the region’s trading platform for contemporary art remains resolute. “Let’s not kid ourselves,” says Syrian-born art dealer and gallerist Khaled Samawi, whose Ayyam Gallery network now stretches across Damascus, Beirut, and Dubai, with further outposts planned for London and New York. “The Middle Eastern art market only really began to get professional five or six years ago. And now there are more important galleries in Dubai than in the rest of the Arab world combined.”

atar’s aspirations are expressing themThe Hong Kong International Art Fair has swiftly become an selves at a more national level. Meminstitution. This work is by artist bers of the Royal Family, notably Sheikh Mu Boyan. Hassan al Thani, have been amassing Western and Middle Eastern art since the mid 1980s. In December, art-industry bible Art + Auction declared Sheikha Al-Mayassa bint Hamad bin Khalifa Al-Thani, daughter of the Emir of Qatar and chairwoman of the Qatar Museums Authority (QMA), the world’s most important art collector. “Sheikha Al-Mayassa has the resources of an entire country at her disposal,” says Benjamin Genocchio, editor-in-chief of Art + Auction. This >  43

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WORLD MARKETS Countries in transition The India Art Fair in New Delhi attracted over 80,000 people this year. This sculpture is by Indian artist George K.

Andae nat. Ed que magnate mporem. Os eiciis doluptas voluptur. Um esent. Eriae vellabo. Ucian dam adio

brand names of contemporary Chinese art, such as Zhang Xiaogang, Zeng Fanzhi, and Zhang Huan, enjoying success far beyond their national borders. At home, however, mainland collectors have been honing in on twentieth-century artists working in Western styles, such as Zao Wou-ki or Chen Te Chun, as well as more traditional artists such as Qi Baishi, whose 1946 painting Eagle Standing on a Pine Tree sold to Shanghai-based collector Liu Yiqian and his wife Wang Wei for US$65.5 million last May.


Sotheby‘s appraises art in Abu Dhabi and offers it for sale around the world. Here guests discuss work at a preview.

is clear as the QMA’s dynamic new complexes – Mathaf: Arab Museum of Modern Art and the Museum of Islamic Art – spearhead a program of new institutions, vast acquisition funds, and lavish installations by guest artists. Yet it’s hard to find an independent gallery outside the QMAdirected buildings, prompting questions about who exactly will be visiting the planned portfolio of state cultural institutions.

T Last year the Chinese art market doubled in size to €9.8 billion – a quarter of the global market.

his question is perhaps answered by understanding Qatar’s long-term goals. For the government in Doha, culture is being deployed as part of a wider plan to elevate the country’s profile. By amassing art, building world-class institutions, and generally working to secure a reputation for cultural supremacy in the region, governments in the Gulf are shrewdly echoing the nation-building ethic of nineteenthand early twentieth-century America. In stark contrast to activity in the Gulf, the attitude of Chinese authorities to contemporary art, as demonstrated last year in the case of artist Ai Weiwei’s detention, is complex. Yet there is no doubt that following the Chinese economic boom, the energetic spending that characterized the Hong Kong art market in the early 2000s has now taken hold across China, with the big

s in the Gulf, it was foreign art dealers such as David Tang, Charles Saatchi, Uli Sigg, and Guy Ullens who initially made forays into the unexplored Chinese art market in the early 2000s. Chinese tastes were for more traditional art and artifacts, and contemporary art was viewed, for political and investment purposes, with skepticism. But recent years have seen Chinese collectors rush headlong into the country’s art scene. “If we look post-2008,” says regional expert Michael Frahm, of Frahm Limited in London, “Western buyers start to play a less significant role, and the rise of the Chinese buyer becomes apparent. And it is now Chinese buyers who drive the market forward.” According to the TEFAF Art Market Update 2012, in the space of one year, from 2010 to 2011, the Chinese art and antiques market more than doubled in value to around €9.8 billion, and a staggering 23 percent global share of a global art market currently estimated at €46.1 billion. Georgina Adam of The Art Newspaper points to the massive increase in freshly minted billionaires as key in fueling growth. “The Chinese Luxury Consumer White Paper 2012 says that there are 2.7 million high-net-worth individuals in China with personal assets of more than 6 million yuan [US$950,000],” she explains. “Then there are also 63,500 ultra-high-net-worth individuals with assets of more than 100 million.” While the new art markets of the Gulf, India, and China all owe their rapid growth to this new breed of moneyed collectors, eager to diversify assets and reclaim something of their countries’ cultural energy, these are early days for contemporary art in the Middle and Far East. Artists are still coming to terms with the new demands of domestic and foreign markets, and opportunities for exhibition and sales are still growing. Yet the time has never been better for new collectors to enter the market – prices are still ebbing at relatively low levels following the global meltdown of 2008, while the quality and range of available art from emerging hubs are increasing exponentially. Contemporary Indian, Chinese, and Middle Eastern art could well prove to be a wise long-term bet.

Arsalan Mohammad is the editor of Harper’s Bazaar Art Arabia.

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High Growth Markets_August 2012

The discerning eye of Dubai

Salsali switched from oil to a scene with an even higher octane.

Looking for collectible contemporary art in the Middle East? Meet Ramin Salsali. By Arsalan Mohammad.

Photos: dpa Picture-Alliance, Martin Parr/magnum/Agentur Focus, Isidora Bojovic


ubai-based art collector Ramin Salsali is one of the most influential figures in the Middle Eastern art world today. From petrochemical consulting to unofficial arts advisor to the UAE authorities, the arc of Salsali’s career reflects a trend in many emerging economies where art and art collecting have become a growth market. Last November, Salsali opened his private collection to the public. Today, the Salsali Private Museum in Dubai has become the go-to address for collectors investigating the Middle Eastern art scene. “Salsali reflects the growing globalization of art collecting,” says Robin Woodhead, international chairman at Sotheby’s. “He has all these influences, and they’re reflected in his collection.” Woodhead says increasingly sophisticated collectors in the UAE are now looking beyond their own borders. Salsali was born in Tehran and studied in the United Kingdom and Iran before relocating to Germany in the mid-1980s to study economics and management and industry design. He graduated in 1993 from the Ludwig Maximilian University in Munich. He established a consultancy in the late 1980s called Teamec, focusing on innovative and green technologies for the petrochemical industry. The business flourished and diversified. All the while, Salsali was amassing art worldwide, forging the connections with artists and dealers that he continues to maintain today. He has become a key figure in the Middle East art market and an

influential player in the local collecting scene. His enthusiasm and drive mirror Dubai’s cultural ambition. Salsali’s cosmopolitan outlook was shaped in his years as a student in Munich. It was there that he began collecting art, inspired by a friendship with artist Kiddy Citny. Something about the artist’s giant, primitive figures, which adorned sections of the Berlin Wall, resonated with the young Iranian. Understanding Citny sparked a larger interest. Salsali’s international travels with Teamec brought him into contact with a huge variety of artists in cities across the world, which was endlessly fascinating for the budding collector. “I had launched my company, acting as a consultant for marketing heavy equipment to the petrochemical industry, so I was traveling a lot and would be alone in a strange city. So I had to overcome my ‘Lost in Translation’ feelings by going to galleries and museums, and step by step, you begin to buy art. You build a connection with cities.” His collection expanded, soaking up new works by artists of all backgrounds; incorporating diverse media, styles, and forms; and including work from around the world. It numbers close to six hundred pieces.


y repurposing a spacious warehouse in the Al Quoz estate into the Salsali Private Museum, he exhibits selections from this collection (see page 49), and engages with the burgeoning trend for collecting art that is spreading through the Gulf region.

A decade ago, contemporary art barely existed in Dubai. Salsali’s mission has been to encourage and educate potential art collectors, but also to support local artists and dealers. He works to spotlight developments in Middle Eastern contemporary art through a global network of collectors and critics, traveling to all the big art shows on the collecting circuit, promoting the UAE as a destination for art commerce. Since opening in November, his museum has hosted shows sourced from his own collection as well as an auction by the charity Magic of Persia. His sustained promotion of Dubai’s art credentials has earned Salsali the UAE’s annual Patron of the Arts award for the last three years running. “It’s a journey of discovery,” says Salsali of collecting art. “Step by step, your tastes mature, you gain experience.” He hopes to encourage others in the region with his museum. “Some people jump into the art market and hire others to create a collection. They are investors, not collectors.” Salsali likens people who get into art purely for the money to a prearranged marriage, where love is a secondary consideration. Dubai’s top arts patron is bubbling with plans for the future. His model is new, because the mission is new: linking the dynamism of art in today’s Middle East with markets in the West. On the drawing board is a gallery in Berlin, for example. Says Salsali: “I am the man who falls in love first, and then gets married.” 45

OFF THE CUFF with Carlos Raúl Yepes

Making up for lost time Carlos Raúl Yepes, CEO of Colombia’s largest bank, Bancolombia, tells Chris Kraul why his nation’s commodities-driven economy – and his bank’s portfolio – is growing so fast.


n Colombia, total credit grew 27 percent last year. In the US, total loans grew only 1.2 percent. What’s driving the growth? For years, Colombia was held back by security problems, but is now making up for lost time. The economy grew almost 6 percent last year and should expand 5 percent this year, despite some global uncertainty. For the past decade, the government set priorities to restore security, ensure stability in our judicial and regulatory norms, and preserve the independence of institutions like our central bank. We now see the benefits of those policies. The upturn in the economic cycle and the commodities boom have also helped. Last year, Standard & Poor’s raised Colombia’s sovereign debt to investment grade, a rating it had lost in 1999 when the economy was in crisis and security was at its worst.

the still-high rate of poverty, many more people can qualify for loans. Four million people – 8 percent of the population – have joined the banking system in recent years. As for commercial loans, which grew 15 percent last year in our bank, businesses have more confidence in the future – that inflation is under control (currently at about 3.5 percent), and that interest rates, while rising slightly over the past two years (to 5.25 percent from 3.5 percent), are not so volatile as in the past. As for foreign investors, the president and the finance minister Juan Carlos Echeverry stress to companies that the rules of the game won’t change, unlike in other Latin American countries.

Those assurances seem to have struck a chord. According to Banco de la Republica, FDI in Colombia nearly doubled in 2011 from the previous year to US$13.2 billion, much of it for oil and coal-mining projects. But that doesn’t fully explain why Colombia will soon be producing one more businesspeople and consummillion barrels of oil a day – 80 percent ers are walking into Bancolombia more than branches to take out loans. it averaged Over the last year, your in 2005 – 952-branch bank grew its and we’ve loan portfolio by 20 perbecome one cent to US$47 billion in The 47-year-old – CEO of of the world’s assets. Bancolombia since February five largest coal There are several fac2011 – has a law degree from exporters. But tors. First, Colombian Medellín’s Pontificia Universiin other areas as per capita income dad Javeriana, and took execuwell, Colombia is is now at about tive business classes at Yale developing in ways US$10,000, triple and the University of Pennthat would have what it was five or sylvania. Since joining Bancobeen impossible in six years ago, and lombia in 1994, he has held the past. The governthe unemployment several positions, including ment has identified rate has fallen a general counsel and auditing US$55 billion that over point to about vice president. He sits on the the next ten years will 9 percent over board of several companies be spent on public infrathe past year. and civil society organizations. structure projects – on So, despite

Carlos Raúl Yepes

Carlos Raúl Yepes: Colombia has learned a few lessons from the crises of the past.

airports, highways, ports, and railroads that have been neglected over the past decade. Building those projects is essential for Colombia to better develop the manufacturing sector that we so far have lacked. We are also seeing rapid expansion of the services industries to accommodate all the mining and hydrocarbons activity. Air-passenger traffic and tourism are also growing at a high rate. So I think the pace of growth can be maintained. After years of negotiations, the US-Colombia Free Trade Agreement commenced its ten-year phasing-in process in May. What will the impact be for Bancolombia? More than one-third of all Colombia’s foreign trade executions are performed by

46 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Photo: Paul Smith/Bloomberg/Getty Images

High Growth Markets_August 2012

Bancolombia and its offshore subsidiaries, so we expect an important shortterm increase in those flows. Demand should rise for working capital loans, capital investment loans, foreign exchange flows, and risk management alternatives. We could see a more solid macroeconomic environment for the whole country, meaning customers will invest more, create more jobs, and trade not only with the United States but also with our other commercial customers. Colombia suffered a severe economic and banking crisis in the late 1990s. Are Bancolombia and other institutions now more structurally sound? Colombia has learned from its past crises, and is better able to manage credit

»Demand should rise for working capital loans, capital investment loans, foreign exchange flows, and risk management alternatives.« risk – partly because the authorities are more independent than before. Mortgage loans are now strictly limited to 70 percent of a home’s total value. We are part of a globalized economy like any other nation, but I think Colombia was prepared in a technical sense for what happened to the US and European banking systems. Local banks don’t have that

much exposure to the euro crisis. But security and corruption are still issues here, and an overhaul of the tax system is badly needed. We have to be careful that households don’t raise their debt too suddenly and threaten stability. But I’d say Colombia’s banking system is showing itself to be less vulnerable to external shocks, and can adapt to changing economic conditions.

Exciting Market Are you doing business in Colombia? On our website you will find more information on this market. 47

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BACKSTORIES Global bites


sunshine in Chongqing. The Chinese call it Fog City, and overcast skies are the norm. Sweltering summers, with temperatures pushing 40°C and high humidity, are followed by chilly and rainy winters. With so many factories and cars, Chongqing is one of China’s most polluted cities. MONEY

CHINA’S CURRENCY is the yuan,

also known as RMB (US$1 is currently worth 6.3 yuan). All Bank of China and ICBC ATMs take Western cards, as do some other banks. Credit cards are accepted at major hotels and stores. Be ready to pay in cash everywhere else. GETTING AROUND



Chongqing The megalopolis known as Fog City has doubledigit growth and food of eye-watering spiciness.


eep in China’s southwest and riding high on five consecutive years of double-digit economic growth, vast and sprawling Chongqing is China’s least-known and fastestgrowing industrial hub. Home to around 30 million, it’s often cited as one of the world’s largest cities. In fact, it’s a municipality, carved out of Sichuan Province in 1997, and the actual population is a more manageable seven million or so. Known for its steep, winding streets – and consequent lack of bicycles – Chongqing is a key manufacturing base for car- and motorbikemakers, as well as iron, steel and aluminum producers, while IT and electronics are increasingly important. The city’s location by the Yangtze River means it is also a major inland port. Overseas exports doubled last year alone, and foreign companies are arriving in ever-increasing numbers. That has prompted a much-needed increase in the number of four- and five-star hotels. Culturally, though, Chongqing remains a backwater compared to Beijing and Shanghai, and attracts far fewer tourists, so Western-style restaurants and bars are scarce.

are plentiful, but frequent traffic jams make it essential to allow plenty of time to get around. Fares start at 8 yuan; a taxi from the airport to the center is around 70 yuan. Very few taxi drivers speak any English, so have your destination address written down. BUSINESS ETIQUETTE GUANXI, or connections, are

everything in China, a country where the government and commercial world are inextricably linked. The Chinese conduct much of their business outside the office, and foreigners can expect to be required to attend many banquets and dinners. Drinking alcohol is often involved. Take as many business cards as you can and hand them over in a formal fashion. DINING CHONGQING IS famed through-

out China for its fiery cuisine. The local speciality is hotpot, where diners sit around a bubbling bowl of soup containing eye-watering chilis and mouth-numbing peppers and then add meat, fish, and vegetables. Even if you’re used to spicy food, Chongqing hotpot can blow your head off. The city’s most famous hotpot joint is the cavernous Cygnet Hot-Pot

Palace (6 Xinchongqing Plaza, 22 Minzu Lu, Yuzhong District; +86 023 6378 8811). If you can’t handle the heat, or the noisy, smoky, and chaotic atmosphere that characterizes most Chinese restaurants, then retreat to the Cloud Nine Revolving Restaurant (29th Fl, Yudu Hotel, 168 Bayi Lu, Yuzhong District; +86 023 6382 8888), which serves Cantonese cuisine in plush surroundings with a fantastic view over the Yuzhong Peninsula. For quality Western food and foreign wines, the major hotels remain your best bet. Try Portico’s at the five-star Harbour Plaza (Wuyi Lu, Harbour Plaza, Yuzhong District; +86 023 6370 0888). NIGHTLIFE KARAOKE is far and away the

most popular entertainment option for locals. The only genuine Western-style bar in Chongqing is The Harp Irish Pub (9 Fl, Hongyadong; +86 023 6303 8655), which has imported beers and is a key place to watch sports. The Cotton Club (Jinta Bldg, 5 Minsheng Lu, Yuzhong District; +86 023 6381 0028) is popular with both locals and expats and hosts occasional live music. TIME OFF WEST OF THE CITY CENTER is

Ciqikou Ancient Town. It’s rather twee but does offer a glimpse of what Chongqing was like before the skyscrapers and factories arrived, as well as being a great place to pick up souvenirs. Also good for shopping are the stalls and small shops of Hongyadong (see below, KPMG Must-See) and the huge Jiefangbei Shopping Square. Cruises down the Yangtze River are a popular option, especially at night when the city is lit up in a blaze of neon. FURTHER INFO HOTELS RATHER THAN official

tourist agencies are the most reliable source of information, and can book flights and boat cruises. keeps the foreign community updated with the latest restaurant and bar openings.


Stilted houses and spicy hotpot


o visitor should miss Hongyadong, a community overlooking Jialing River 500 meters from where it joins the Yangtze. Over 2,300 years old, the renovated tangle of stilted houses has become a tourist attraction with stalls, shops, teahouses, and restaurants serving local dishes such as spicy hotpot. And it’s only a kilometer from Jiefangbei (the People’s Liberation Monument) and the city’s commercial heart. Chongqing-born John Wang is a KPMG partner in Shanghai. 48 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Photos: Flickr Collection/Getty Images, KPMG, Salsali Private Museum(3)


High Growth Markets_August 2012 Olive Tree (2011) by Larissa Sansour, from the Nation Estate series. Photograph, 42 x 59 cm.


Art collected in the Gulf Artworks from the Salsali Private Museum, Dubai. For story, see page 45.

Guided tour: The whole of Ramin Salsali‘s collection can be viewed online at the website of his museum.

Clockwise from right: There is no beginning, there is no end, there is only passion for life (2012) by Nazzy Belgari and Farideh Lashai; Untitled 3 (2002-03) byTarek Al-Ghoussein; Farideh Lashai and Dr. Mossadegh in Venice (2012) by Amir-Hossein Zanjani.


BACKSTORIES Global bites


The dark side of democracy As Myanmar opens up, everyone is looking for an angle. But there are those who sense a threatening aspect to all the new-found freedoms, writes Christoph Hein.


aung Aung Myin is a lacquer painter with a workshop in Mandalay, where his assistants spend years perfecting their craft. “It takes a good painter about eight years to master every stroke,” he says. Aung Myin learned from his father and grandfather. But suddenly, for the first time in his life, the 57-year-old finds himself in a rush. “We’re thinking of opening a second workshop, because tourists are finally about to arrive in droves!” As Myanmar opens up, everyone is looking for an angle. Rooms are already hard to come by in Yangon. The UN has reserved the entire twelfth floor of the Traders Hotel, but the World Bank and IMF are looking for space. One German businessman reports that last year he was paying US$1,800 a month for a Yangon apartment. Then the rent went up to US$2,700. And now it’s US$3,000. The chef at the Savoy has never been so busy. “Everyone comes in for their business lunch,” he says. “Everyone” including point people for companies like Samsung, General Electric, BP, and Volvo.

ROOMS ARE ALREADY HARD TO COME BY IN YANGON “This is the opportunity we have been waiting for,” says entrepreneur U Moe Kyaw. He’s publishing the first ever Yellow Pages for Yangon. “If the West doesn’t come to our aid now, we’ll return to the arms of China for decades,” says the media executive. “But either way, we Burmese will be the winners.” Moe Kyaw has a simple explanation of why the generals who ran Myanmar for so long appear to have hung up their uniforms overnight: “Fifteen percent of ten dollars is nowhere near as much as five percent of a thousand dollars.” And the ripples from Myanmar are spreading through the region. Bangkok banks are gearing up for a Myanmar boom. Construction company Italian-Thai Development is looking for US$12.5 billion in financing to build a deepwater harbor, a power plant, and a special economic zone on the border. The ripples have also reached the Singapore stock exchange. A few months ago, hardly anyone there had heard of a small company called Yoma Strategic Holdings. Then, suddenly, investors in Singapore flocked to Yoma shares, driving the price through 50

the roof. Why? Turns out Yoma has extensive holdings in Myanmar, including land, apartment buildings, and a contract to sell Chinese-built Dongfeng trucks. Myanmarans were also caught off guard by their country’s sudden rush to democracy, but some are jumping right in. Min Lyat Chan works for the German Uniteam company, training oil workers and sailors in safety procedures. It’s a good job by local standards, paying about US$250 per month – enough for him to send funds to his parents in the south. Still, Lyat Chan has other plans. He would like to come to Singapore with his girlfriend, a nurse. “We can make enough money there to one day return to Yangon and open a sporting goods store,” enthuses the 26-year-old. But Lyat Chan also senses a threatening side to freedom. “Everything is happening so fast,” he acknowledges. “Not all are prepared. I hope we are not overrun with foreigners.” Tin Maung Than runs the NGO Myanmar Egress, which works with European foundations to promote

No longer boxed in and waiting for the tourists that may finally arrive.

democracy. “There is no historic model for the opening we are now experiencing,” he says. “Recipes from the 20th century, in South Korea or Indonesia, are of little use.”

RECONCILIATION WITH THE PAST HAS NOT YET BEGUN So he, too, detects a dark side. A reconciliation with the injustices of years of dictatorship has not even begun, but Maung Than already finds himself having to make excuses. “They now accuse us of working too closely with the Generals. But we have never worked with individuals. Only institutions.” Back at his lacquer workshop, Aung Myin would welcome a flood of tourists, but is also concerned. “I wouldn’t want to see my granddaughter trade her longyi for Western clothes. We won’t sacrifice our traditions. Freedom is good. But we shouldn’t sell our souls.” Singapore-based Christoph Hein is the Frankfurter Allgemeine Zeitung business correspondent for South Asia and Pacific.

High Growth Markets_August 2012


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HIGH GROWTH MARKETS Insight and perspective on today’s global economic hot spots

Art of transition North Africa works through the difficult transition to democracy, a new art market emerges in the Gulf and Far East, and lacquer painters in Myanmar wonder if their traditions can survive tourism. Outsourcing R&D No more budget brainpower Strategic alliances The fashionable way into emerging markets Russia joins the WTO Who stands to benefit?


One of the most influential figures in the emerging art world of the Middle East I had launched my company and was traveling a lot, and I had to overcome my ‘Lost In Translation’ feelings by going to galleries and museums. And I began to buy art. A true collector cannot be engineered. Some jump into the art market, hire people to create a collection. They are investors, not collectors. But in time, they might develop a love for art. I encourage them to open their eyes to a wider spectrum of art, avoid what their advisor told them. It’s like a man or woman who marries without love but with calculation – but then, step by step, they fall in love. I am a man who falls in love and then marries! For more on Salsali and the emerging art market in the Gulf and China, see pages 42–45. The painting above is Shirin Neshat (2007) by Egyptian artist Youssef Nabil.

August 2012

High Growth Markets (August 2012) - Global Edition  

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