High Growth Markets

HIGH GROWTH MARKETS Insight and perspective on today’s global economic hot spots September 2014 Unleashing Africa’s potential A strong manufacturing sector is the key to sustainable growth

Telecommunications in Latin America Sourcing the funds to deliver high-speed connectivity

India’s budget Can the new government translate bold words into action?

M&A in Indonesia Open for business — but investors must do their homework A constantly changing global landscape

The fast pace of change in developing economies is throwing up new challenges and opportunities. As companies look to take advantage of opportunities in India, where the newly elected government is easing the restrictions for investors in hopes to regain its status among the world’s leading economies, or in Africa, where countries such as Nigeria and Kenya are resizing their GDPs to show the true value of their markets, the doors are open for a variety of businesses to enter. At KPMG, we understand the complexities of an international investment strategy and have built up on-the-ground expertise across high growth markets. We also recognize that innovation is not the exclusive domain of mature countries, and it creates some exciting openings for new business models — as opposed to simply exporting current ways of working. In this issue Africa’s potential has long been a subject of speculation, with its billion, mainly young, citizens and rich natural resources. The article on page 11 discusses why the continent has yet to fulfil its promise, and it argues that only through manufacturing can economies build a sustainable base for long-term affluence. Fabric producer Vlisco can hardly claim to be new to Africa — the company is almost 170 years old — but through its clever brand repositioning, it is making and selling more of its products than ever before in the region, targeting the middle classes. Read more about this African success story on page 14. India’s recent economic record pales beside that of China, one of the factors behind the landslide victory of the Bharatiya Janata party. The new government’s first budget comes under scrutiny on page 16, receiving a cautionary thumbs-up for its pledges to boost the industrial sector through economic zones and an easing of restrictions on foreign investment. Consumers across Latin America are becoming increasingly frustrated at the poor broadband coverage that is restricting their use of smartphones and holding back business. An insightful feature on page 18 charts efforts to attract sufficient investment to create a comprehensive telecommunications infrastructure, with the likes of Colombia, Peru and Chile leading the way. Telecommunications deregulation in Mexico has largely replaced a state monopoly with a Global briefs private version, and page 19 outlines government attempts to shake up the market through network sharing and new licenses. 4 Observ ations, trends and indicators Indonesia can no longer be described as a sleeping giant, with the world’s fourth largest population and a GDP of US$900 billion. However, as the commentary on page 21 observes, deal makers are frustrated by a cumbersome regulatory climate and complex Investment labor and insolvency laws, and need help navigating their way to successful M&As. spotlight Finally, we return to the theme of innovation in 8 Libya: On the cusp of a new era of an Off-the-cuff interview with consultant, author growth post-Gaddafi and Asia expert Ben Simpfendorfer. His recipe for success in the region is a heady cocktail mixing one part of e-commerce with two parts of local presence, shaken not stirred!

Mark Barnes Global Lead Partner KPMG High Growth Markets

Growth markets Business insight 11 African potential: Helping Africa’s emerging 22 Reading between the lines: Change economies build sustainable growth Readiness Index 14 Material gains: Vlisco’s brand identity is accelerating growth within West Africa Off the Cuff 16 Backing strong words with deeds: India’s 24 Ben Simpfendorfer takes us on a ride across first budget under a new regime the East 18 Ringing in the changes: The future for telecom in Latin America Backstories 19 Better connections: Mexico’s telecom reforms paving the way 26 Chennai, India 21 Just the deal: Indonesia’s M&A market is open for business

Fast food, fast cars, fashion, fuel, financing and other trends happening across the world’s emerging markets.

PHILIPPINES BANKING Philippines opens its doors to foreign ownership of banks A new act permits overseas banks to fully own existing Philippine banks or set up subsidiaries or branches in the country. Any applicant bank must be “established, reputable and financially sound”, widely owned and publicly listed in its country of origin, except where owned and controlled by its government. Applications will also be influenced by the strategic trade and investment relationship between the Philippines and the bank’s home country, as well as the reputation for innovation and willingness to fully share its technology. Minimum capital requirements will be the same as for Philippine banks.

INDONESIA INFRASTRUCTURE Building for success New president set to bet big on roads, rail and ports Essential infrastructure improvements could revitalize Indonesia’s flagging economy by lowering distribution costs and speeding up rural development. Newly elected president Joko Widodo has pledged to build 2,000 kilometers of roads and 10 seaports, to better connect consumers in the world’s VIETNAM PRIVATE EQUITY fourth most populous nation. Poor transport links have swollen logistics expenditure to about 27 percent of gross domestic product (GDP), the highest Top of the radar in Southeast Asia. This holds back sales everywhere from the A survey of private equity firms suggests that Vietnam is a smallest shopkeepers to consumer giants such as Unilever. more attractive proposition than neighbors Myanmar and Those living in the 77,548 villages scattered throughout Indonesia. Half of those polled believe the economy will this vast archipelago are the hardest hit, with household improve in 2014–15, with retail the single most appealing consumption of staple products up to 60 percent lower than sector, followed by food and beverages and hospitality, in towns and cities. leisure and property. The coming years should see Indonesia’s Food & Beverage Producers Association says considerable M&A activity, as foreign capital flows into the sales could grow by as much as 50 percent with improved country in ever-increasing volumes. One of the priorities of access to rural areas. This should mean good news for any new investor will be to restructure businesses, bolster infrastructure companies poised to benefit from a slew of new management and raise production efficiency. projects.

CHINA AUTOMOTIVE Driving expansion New initiatives by GM and BMW reflect China’s position as the world’s number one auto markets. China’s insatiable hunger for cars has GM has begun combining sales channels 2028. This expansion includes a new, fueled significant developments by of its two largely-China-only brands lower-price model designed specifically two major global players. In response with SAIC, China’s biggest automaker, for local tastes — a growing trend to surging demand for larger, low-cost including plans for a limited number of amongst foreign manufacturers. With family vehicles, General Motors (GM) ‘dual-brand stores’ where consumers China surpassing the US as BMW’s is redesigning its distribution network could buy vehicles from both brands. largest market, capacity in the German to speed up sales of its Baojun range. At the premium end of the market, producer’s two Chinese factories in Sales in China of MPVs rocketed by BMW intends to double the number of Shenyang is due to rise from 300,000 to 55 percent during the first half of 2014, models it produces in China and extend 400,000 vehicles per year. as consumers in rural markets and lower- its successful alliance with local partner tier cities joined the clamor for mobility. Brilliance China Automotive Holdings to

BRICs FINANCE UAE HEALTHCARE New BRIC Cheaper flights for development bank health tourists Overseas patients traveling to any of India’s Apollo launched Hospitals can now benefit from discounts on flights with Middle Eastern airline Emirates. Apollo is at the In an effort to accelerate economic growth, the heart of the boom in health tourism, with customers BRIC group of emerging powers has introduced a from over 120 countries seeking high-quality, affordable US$50 billion development bank and a US$100 billion healthcare. The agreement covers 19 countries across crisis contingency fund. These initiatives are seen as the Middle East and Africa, with discounts up to counterweights to the Western-dominated World Bank 10 percent. Apollo’s Indian customers are also eligible and International Monetary Fund. Based in Shanghai, for savings on flights with Emirates. the bank’s first president will be from India, with a Brazilian chairing the board. The capital will be equally shared among Brazil, Russia, China, India and South Africa, and the emergency fund is designed to help avoid short-term liquidity pressures, promote further BRIC cooperation, strengthen the global financial safety net and complement existing international arrangements.

KENYA ECONOMY Kenya’s economy a fifth larger than previously estimated A statistical revision has increased the time into the World Bank’s definition of appetite for the bond, with analysts size of the Kenyan economy by a fifth, ‘middle-income’. anticipating interest rates as low as spelling good news for foreign investors Kenya’s government is hoping to 7 percent. looking to buy into the country’s debut raise US$1.5 billion–$2 billion on the This resizing follows the sovereign bond. A change in calculation international market on the back of announcement earlier in 2014 that methods and better data collection rising annual growth rates projected at Nigeria’s GDP was 89 percent larger than has raised the country’s GDP to 5.8 percent for 2014 and 6.4 percent estimated, making it Africa’s biggest US$50 billion, propelling it for the first in 2015. Early signs indicate a strong economy.

SOUTH AFRICA PAYMENTS Shopping safely in cyber space With the launch of a new digital wallet facility, MasterCard’s South African customers can now make secure digital payments online. The MasterPass acceptance network allows user to store all their personal details in one place, enabling single-click checkouts from any device, without the need to enter card numbers, addresses and other information. Standard Bank is the first South African financial institution to offer MasterPass, with others soon to follow, and apps are available on iOS, Android and BlackBerry.

MYANMAR INVESTMENT Universal attraction Rolls-Royce and Vietnam’s biggest pharma company to invest in Myanmar In another sign of Myanmar’s resurgence, engineering giant Rolls-Royce is supplying engines, associated systems, and support and maintenance services for the Hlagwa Power Plant. The gas engine-based independent plant is owned by local operator RGK+Z&A Group and is a major step towards improving the country’s electrification rate of just 26 percent. Vietnamese pharma company VietNamNet Bridge — Hau Giang (DHG) is in talks over a joint venture project with a local firm to build a production facility. Myanmar offers a number of incentives for pharmaceutical producers, providing a sound base for DHG to increase its export revenue to offset predicted declines in its home antibiotics market. Several Vietnamese companies have invested in Myanmar, attracted by a population of 65 million and average annual economic growth rates of 8.7 percent over the past decade. DHG expects to put US$4.5 million into the deal, and construction of the plant could begin as early as 2015 if the two parties reach an agreement.

BRAZIL IT SECURITY Online freedom Brazil’s new internet ‘bill of rights’ aims to safeguard freedom of expression, protect users’ privacy and ensure equal access. In a move that has far-reaching implications for online service providers (ISPs), retailers and publishers, Brazil has introduced a new Internet Law, with a strong focus on privacy. Collection and use of private information is now restricted, and such data cannot be shared without users’ consent, which will impact the use of personal details for marketing purposes. Any company with servers located outside of Brazil INDIA E-COMMERCE is still subject to the law if they provide services to Brazilian users; this could conflict with their own national privacy or Jostling for position data protection laws. Amazon’s entry into India’s e-commerce market has heightened Operators will no longer be able to charge higher rates for content that uses competition and increased the pace of consolidation. greater bandwidth, like video streaming The arrival of global giant Amazon has shaken up the US$2.3 billion Indian or voice communication services. The e-retailing sector, triggering an upsurge in M&As. Deal value in the first half law also clarifies that providers such as of 2014 had already exceeded the previous year’s total, spearheaded by the Facebook will not be liable for damages US$330 million capture of online fashion retailer Myntra by rival Flipkart. arising from hosting user-generated Investors are continuing to inject capital into a market that is forecast or uploaded content. Many Brazilians to account for 3 percent of all Indian retail sales by 2020 — totaling have no access to the internet, and the US$32 billion. With few large players, further consolidation can be expected law obliges the government to improve as niche and specialty businesses are acquired by bigger firms. services and connectivity.

LIbYa Three years after the fall of Muammar Gaddafi, is Libya on the cusp of a new era of growth?

he low turnout in Libya’s June 2014 Consequently, a cash-strapped government with an emphasis upon agriculture, tourism, general elections demonstrated the has been forced to cut back on plans to fisheries, mining and natural gas. The Tchallenges gripping this fledgling replace and repair roads, universities and agricultural sector accounts for less than democracy, as a combination of fear of schools damaged during the 2011 uprising. 2 percent of GDP but is becoming a top priority, violence and political apathy kept voters These challenges, however, can open the with domestic food production currently away in their hundreds of thousands. Such door further to private finance for a wide range meeting only 25 percent of demand.2 concerns should not overshadow the plentiful of infrastructure projects. The government The government is extending a number opportunities in a country still rebuilding after has ambitious plans to build a railway system of incentives designed to boost the tourism a brutal conflict and decades of corruption. stretching from Tunisia to Egypt, to expand sector, with state-owned hotels being offered Infrastructure is arguably the single most the highway and road network, and develop to private and foreign operators. In 2012, pressing need, particularly for the oil and seven major airports. Healthcare is lagging Tameer Holding (a United Arab Emirates gas sector that forms the core of Libya’s behind comparable nations, while the rapid property developer) announced a deal economy, accounting for around 70 percent urbanization has created a dire shortage of with the Libyan authorities to develop a of gross domestic product (GDP), 95 percent housing and associated services. US$20 billion residential and tourist project of state revenues and 98 percent of exports.1 near Tripoli.3 Several major hotel groups are Poor links to ports means that the industry is Strength through diversity launching new or revamped properties, operating well below full capacity, a situation Libya is anxious to reduce dependence on including Sheraton, Marriott, Intercontinental exacerbated by industrial action that has hydrocarbons by diversifying its economy, and Radisson. closed oilfields and blockaded key ports.

1 Hopes Pinned on Private Sector as Libya Economy Slumps, Daily News Egypt, 16 February 2014. 2 Economic Developments 2013: Last Year Libyan Economy Experienced Major Rebound, The Tripoli Post, 23 July 2013. 8 3 Ibid.

© 2014 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 September 2014 Investment Spotlight 83rd largest economy in the world and 105th largest GDP per capita

Population:

6.2 million With a labor force of 1.35 million

Urban Population: 77.7%

Demographics: 0–14 years: 26.9%; 15–24 years: 68.3%; 65 years and over: 3.9%

Light manufacturing has growth potential rare. A few Libyan banks have already been Transitioned to a full democratic government as a result of the June 2014 both for domestic use and for export to privatized, but foreign banks and insurance election. Mediterranean and North Africa markets, companies are currently prohibited — at with a number of former state-owned firms least until 2015 when a new constitution Major Cities: Tripoli 2.2 million; being privatized. Small businesses have been is drafted, which is also likely to include a Benghazi 650,000; Misratah 385,000 at the vanguard of progress, with shops and framework for Islamic finance. Capital: Tripoli 2.2 million boutiques in Tripoli and other cities boasting With high unemployment and a young the latest in luxury brands — often the results population, labor is in plentiful supply, although Type of Government: Parliamentary of partnerships with foreign investors. technical, professional and managerial skills Republic are much harder to find. Investors into Libya Encouraging signs for private would almost certainly have to import talent Local Currency: Libyan Dinar (LYD) investors on a short-term basis to fulfil crucial roles Official Language: Arabic Options for financing should broaden with and enable skills transfer, while increasing the anticipated arrival of new laws regulating training across the workforce. One of the Twenty-seventh-largest producer of crude oil in the world and 15th-largest public-private partnerships (PPPs), along drivers for PPPs is to acquire essential project exporter. Ninth-largest reserves of with pro-business reforms to encourage management and other competencies from petroleum worldwide, contributing more mature markets. foreign direct investment and expansion of to more than 95 percent of total After 43 years in power, Gaddafi’s shadow the private sector. The next bidding round government revenue. for exploration licenses in 2014–2015 is inevitably looms over Libya, and the current set to include softer terms, to increase the troubles in the east of the country indicate Libya’s population is primarily Arab, Berber or a combination of the two. attractiveness of the oil and gas sector. that the path to democracy may not always be smooth. A more permanent government Telecommunications is also expanding, and Libya has a high literacy rate of around should eventually restore stability, with tenders for a third mobile phone license are 90 percent. expected sometime between 2016 and 2018. Real GDP growth forecast to enter the A number of sectors permit some form black at 2.5 percent in 2015, rising to The largest water development project ever devised, the Great Man-Made River of foreign ownership, notably manufacturing. around 5 percent thereafter. This should Project, brings water from aquifers under Participation is typically through joint ventures, lay the foundations for economic expansion, the Sahara to Libya’s coastal cities. and 100 percent fully owned operations are fuelled by infrastructure projects and healthy participation of foreign capital.

African potential: unleashed or unfulfilled? A strong manufacturing sector can help Africa’s emerging economies escape the poverty trap and build sustainable growth.

ith a billion people spread across Africa needs to emulate China, wishing to start up a manufacturing facility 54 diverse nations, and rich natural has to cope with poor transport connections, whose plants and factories have Wand agricultural resources, Africa an unskilled workforce, constant power is often described as the last true frontier brought employment to tens of cuts and restrictive labor laws, as well as for economic development. Many of its millions. painfully slow processes for resolving any governments are starting to address post- commercial disputes. The thriving outsourcing colonial inefficiencies by trying to establish provide some useful lessons on how Africa sector — widely held up as a symbol of stable democracies, effective legal and tax can fulfil its latent potential. Through careful the new India — provides work for just a regimes and realistic economic strategies. forward planning, China has become the tiny proportion of the 1.1 billion population. These improvements, along with the obvious workshop of the world, with a strong Consequently, China continues to enjoy attraction of a young, growing consumer manufacturing industry that has brought higher employment levels and a stronger class, have attracted considerable interest employment to tens of millions in its plants GDP growth rate, while India struggles with from foreign investors. and factories, and created further jobs in poverty and inequality. Yet success in Africa is by no means supply, maintenance, logistics, sales and Creating an industrial base assured, with progress held back by marketing. This success has been founded bureaucracy, inadequate infrastructure on a robust supporting infrastructure, flexible Across the African continent, countries face and a deep-rooted nepotism that obliges working practices and an investor-friendly the same hurdles that have held back India. entrepreneurs to share their wealth and environment featuring special economic The riches of its resources and agriculture are offer jobs to relatives and friends. Business zones offering tax exemptions and incentives. under-exploited, as most materials and foods people also have a bias towards trading over India, on the other hand, has seen its are exported in their raw forms, rather than production, preferring a quick and easy mark- progress thwarted by red tape and political adding value through refining and packaging up on goods to the longer-term challenge stalemate, with lack of investment in locally. Meanwhile, government efforts to of making things. ports, airports, roads and energy, limited impose centralized strategies typically face The contrasting fortunes of two other tax concessions, and major restrictions opposition at federal and local levels. emerging economies — China and India — on foreign ownership of assets. Anyone

Africa is still not widely perceived as a and African nations occupy most of the Since 2009, special economic welcoming place for overseas capital. Only bottom rankings. Despite some advances, zones have been introduced in three of its countries made it into the 2014 fiscal systems lack stability, corruption is still several African countries. World Bank’s Ease of Doing Business Index a major problem, while concerns remain over top 50 (Mauritius, Rwanda and South Africa the fairness of judicial systems. in 20th, 32nd and 41st places, respectively),

1 Angola Boosts Infrastructure Spend to Attract Investment, Bloomberg, 3 October 2013. 2 GE Oil & Gas, GLS Form JV to Support Growth in Angolan Energy Sector, Energy Business Review, 30 January 2013. 3 Nigeria Wins $1bn General Electric Manufacturing Investment, Financial Times, 31 January 2013. 12 4 GE Plans to Establish an Assembly Plant in Ethiopia, The Reporter, 25 January 2014.

In order to build modern economies, giant’s confidence in Africa, it is planning to and demonstrating a commitment to local Africa’s countries and regions must follow in establish a medical equipment assembly communities, investors can be part of the China’s footsteps and invest in manufacturing, plant in Ethiopia.4 continent’s renaissance. which not only creates jobs, but boosts the Chinese firm Huajian Shoes employs 600 Effective social programs are an integral balance of trade by reducing reliance on workers at its factory near Addis Ababa in part of all multinational organizations’ expensive imports. The Ivory Coast supplies a Ethiopia, but has much bigger ambitions, strategies, whether it is building roads, third of the world’s cocoa, and until recently, by investing over US$2 billion in a light housing, schools and hospitals, improving exported raw beans at a low margin. Its manufacturing special economic zone that sanitation and water supplies, providing government is now seeking ways to raise the aims to create 30,000 jobs as part of a ‘shoe vaccinations and health education, offering proportion of cocoa processed domestically, city’ producing footwear, handbags and free broadband and laptops to schools and through tax breaks and other fiscal tools, accessories. Huajian is partnering with the businesses, or training local workers. mandating that at least 30 percent of the China-Africa Development Fund (CADFund), One common barrier is a lack of certain annual harvest is transformed locally. a private equity facility promoting Chinese essential skills such as engineering, IT and Africa’s second biggest oil producer investment in the continent in agriculture, management. The more enlightened African Angola is trying to diversify its industrial infrastructure, natural resources and industrial governments permit foreign companies to base, by investing in ports, airports, roads and park projects. Other ventures include a power bring in their own expatriate workers, on hydropower. It expects to attract US$4 billion plant in Ghana, a port in Nigeria, cotton farms the understanding that these are temporary a year in non-oil investments from abroad in Malawi and a US$100 million car plant in measures. In Ethiopia, the aforementioned by 2017, with recent projects such as South Africa.5 Chinese shoemaker Huajian feels that the bottling plants for drinks companies and a Since 2009, special economic zones have new business zone will act as a center of US$282 million hotel complex to pep up the been introduced in several African countries excellence to transfer skills to locals.6 country’s tourist sector.1 General Electric (GE) including Zambia, Mauritius, Ethiopia, Nigeria, Commentators often speak of Africa’s and Angola-based GLS Holding have formed South Africa, Egypt and Algeria, with more in growing population as a ‘demographic a new joint venture, with a proposed initial the pipeline, offering exciting prospects for dividend’ promising some two billion investment of US$175 million to construct growth and job creation. consumers by 2050. However, without a a new manufacturing facility.2 strong industrial base, this could quickly In it for the long-term GE is also investing close to US$1 billion turn into a demographic time-bomb of in factories for the energy industry in Having suffered the worst excesses of the discontented unemployed, fomenting Nigeria, creating 2,300 jobs in the local colonialism in previous centuries, African civil disobedience, crime and terrorism. economy — as direct hires or through nations are understandably keen to avoid Manufacturing is the key to unlock the suppliers — and positioning the country a repeat scenario and are wary of the continent’s massive potential, transforming as a regional manufacturing hub.3 And as motives of foreign companies. By investing countries from mere providers of resources confirmation of the US-based manufacturing in the physical and social infrastructure, to mature, broad-based economies.

5 Chinese Firm Steps Up Investment in Ethiopia with ‘shoe city’, The Guardian, 30 April 2013. 6 Ibid. 13

Material gains The desirable fabrics of Dutch company Vlisco Group have been at the heart of West Africa’s fashion trade since 1846. The customer-centric company is now using brand identity to accelerate its growth.

hat surprised me most when I first started working for Vlisco,” “African consumers really feel Wsays CEO Hans Ouwendijk, like they own our brand.” “was that the African consumers really feel like they own our brand, not the other way around.” It’s something of a paradox that says Ouwendijk, who has radically changed one of Africa’s biggest cloth companies is the company’s strategy since arriving in based in a small town in the Netherlands. 2010, when it was acquired by London-based Founded in 1846 in the old textile town of private equity company Actis. “That is not a Helmond in North Brabant, Vlisco originally unique strategy, but we are one of the few sold hand-printed fabrics along the Dutch companies doing this specifically for Africa.” East India Company’s trade routes. These Ouwendijk joined Vlisco Group from fabrics, which used European industrial know- Fashion Fund One BV, a private equity firm how to speed up labor-intensive Indonesian he founded in 2006. Under his leadership, wax batik processes, were bartered during Vlisco has repositioned itself as a brand- stopovers in western Africa and became driven fashion company, helping it counter highly sought after. cheap counterfeits that threatened profits. Over the years, Vlisco’s compelling “The company I inherited was very focused mix of Far Eastern inspiration, European around design and manufacturing,” he says. adaptation to African demand for bolder “Now we focus more on the consumer: on colors and patterns, and high-quality ‘Dutch marketing, brand development, innovations wax’ fabric helped it become a central part of and customer loyalty. Being close to our commerce and culture in West and Central consumer is critical.” Hans Ouwendijk is the The company owns four distinct brands. CEO of Vlisco Group. In 1982, he Africa. Designs acquired different names and graduated in Business Economics symbolic meanings in different countries. In Vlisco is the luxury, aspirational brand, still at the Erasmus University Togo, the market women who sold Dutch produced in the Netherlands. Uniwax and Rotterdam. After his graduation, wax were known locally as ‘Mama Benz’ GTP, which are made in Ivory Coast and Hans Ouwendijk continued his because they became wealthy enough to Ghana, respectively, target the growing career at Laura Ashley (1984–95) own the first Mercedes-Benz cars there — middle class. Woodin, the firm’s smallest and at Mexx (1995–2006). In both and became influential politically and socially. and fastest-growing product, is made in companies, Change Management Fast-forward to the present day, and the Ghana and targeted at younger, pan-African was his main focus. continued popularity of fabric that is turned consumers. Under the direction of Ouwendijk, into made-to-measure, bespoke garments All four brands offer fabrics for consumers among others, the Vlisco Group by local tailors in Africa — where 95 percent to create their own clothes, which accounts has grown into a company with for most of the group’s sales. Top-of-the-line over 2,700 employees. His of Vlisco Group’s sales are generated — strategic plan is paying off. For has helped the company flourish. In 2013, Vlisco also produces scarves and luxury Hans Ouwendijk, bringing back the turnover reached a record US$378.4 million, handbags, while Woodin’s ready-to-wear entrepreneurial spirit within the a 61 percent increase on 2009’s sales of range includes men’s shirts and ladieswear. Vlisco Group is key. The transition US$234.2 million. Volumes are up too, The fact that one of the most successful from product-driven to brand- from 52.4 million yards of fabric in 2009 to fashion brands in Africa is a fabric maker is driven is the enormous success 65.7 million in 2012. driven by cost — it’s much cheaper to have behind the tremendous growth. “We are growing fast in our markets the fabric tailored in Africa — and customer because we are listening to consumers,” taste. Rather than signifying their allegiance

to a trend or community, the consumer popular in particular regions, often influenced “Consumer spending is moving more into wants to stand out with their own designs. by local sayings or landmark events. In products like fashion,” says Ouwendijk. Sales channels play their part too. With Togo, the Love Bomb (or Wounded Heart) “The continent’s economy is growing and traditional bricks and mortar retail still under- design symbolizes the mood of a woman our product offering is in the right spot to developed, most of the company’s fabrics are heartbroken by her husband’s adultery. accelerate growth.” sold via wholesalers and open air markets. Vlisco’s customer focus helps it understand Vlisco’s recent internal research indicates Vlisco Group has 30 stores of its own and such nuances and react accordingly. that the fabric segment will grow by may double or triple that network in the next “We get a lot of feedback from our 100 percent in the next five years. “I was four or five years. wholesale customers and our stores in expecting lower growth of sales and more E-commerce is less developed than bricks West Africa,” says Ouwendijk. “We also focus on ready-to-wear,” Ouwendijk admits. and mortar. “Because of logistical limitations, spend a lot of time and money on research: “In certain countries, consumers prefer to African consumers are not ordering so much looking at trends in the market, what is have ready-to-wear in African prints because from the web yet,” says Ouwendijk. “That happening to particular consumers — they don’t have time to go to the tailor or is likely to change in the next few years. We different cultural groups, for example — and prefer the creativity of the company, but our believe there will be a massive opportunity the key decisionmaking points for individual growth will remain in our core products — for online sales in Africa when the logistical consumers.” our fabrics — for now.” challenges are resolved.” Vlisco Group is sourcing more of its raw Technology is bringing the brands closer Having a product for every price point materials in Africa: in 2010, all cotton was to the people who wear them. “New forms is key to success. “Each brand serves a sourced in the Far East. Now, more than of media are crucial for us,” says Ouwendijk. different consumer. This is an ideal position: 30 percent is grown in the continent. “We “The number of Facebook subscribers to our multiple brands in different parts of this are becoming more relevant in the societies brand pages are far beyond our expectations: fast-growing consumer brand. For Uniwax where we operate,” says Ouwendijk. “That we have more than a million ‘fans’. This is and Woodin, we produce about 400 or 500 really helps in a continent where governments building consumer loyalty.” designs for each brand every year. We bring are looking at the added value of businesses For other brands and retailers new designs to market in a few months,” that enter the market, or who are looking contemplating Africa’s market, Vlisco’s Ouwendijk says. to expand.” story shows the need to be realistic about Customer tastes vary as widely in Africa as With seven of the world’s 10 fastest- timescales — and that success starts with in Europe. Ghanaian consumers, for instance, growing economies in Africa, Vlisco has a lot of listening. like traditional green hues. Certain designs are cause to be confident about the future.

© 2014 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. © 2014 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.

GROWTH MARKETS Backing strong words with deeds

Backing strong words with deeds India’s first budget under a new regime includes some encouraging reforms to tax and foreign ownership, and could ignite the fires of an underperforming industrial sector.

he eyes of the world were on the budget, and understandably, some of the Finance Minister Arun Jaitley when plans lacked detail. Nevertheless, a number The budget vows to revive The presented the new government’s of bold initiatives have laid a foundation for India’s use of special economic budget on 10 July 2014. Prime Minister policy reform and broadly won approval of zones, although more detailed Narendra Modi’s Bharatiya Janata party had the financial markets, with the Sensex — plans are needed. much to live up to, following pre-election regarded as a good barometer of India’s pledges to kick-start India’s flailing economy, prospects — exceeding the 26,000 mark tackle corruption and make the country a in July 2014, having fallen close to 19,000 allowed to sell their products through retail, friendlier place for overseas investors. 12 months earlier. including e-commerce platforms, without GDP growth had dipped below the Manufacturing received a welcome boost any additional approval. 5 percent mark for two consecutive years, with the raising of foreign ownership limits Special economic zones have played a while contracting investment in manufacturing from 26 percent to 49 percent in the insurance big part in China’s ascent to an industrial had slowed industry growth to just 0.4 percent and defense sectors, although some would powerhouse. After years of neglect, the in the year ending 2013. Poor infrastructure have wished for more. India also moved a budget vows to revive India’s strategic was a major contributor to these worrying small step towards its goal of developing use of such zones, although offers little in results, yet highly restrictive rules on foreign 100 ‘smart’ satellite cities by easing the the way of substance at this stage. Zones ownership, along with excessive bureaucracy conditions facing foreign construction have been planned in the ports of Kandla and corrupt, had scared off many potential investors. The minimum size of area to in Gujarat and Jawaharlal Nehru, located financiers, placing India 134th out of the 189 be developed was reduced from 50,000 south of Mumbai, and a further 16 new port nations on the World Bank’s Ease of Doing square meters to 20,000 square meters, projects have also been proposed, along Business Index. and minimum capitalization lowered from with airports in tier I and II cities. Fresh from its landslide electoral victory, US$10 million to US$5 million. Manufacturers Public-private partnerships (PPPs) have the government had only 45 days to prepare with partial foreign ownership are now attracted considerable controversy in India

and other countries, but the Finance Minister has spelt out his desire to increase their use, in order to channel funds into essential infrastructure and industrial projects. He even hinted that the much prized and publicly- owned national railway system could open up to private finance. As the Chief Minister of Gujarat, Narendra Modi presided over a radical improvement in that region’s infrastructure, something which he hopes to repeat on a national scale. Retrospective taxation has proved another deterrent to investors, with a number of high- profile cases involving demands for hundreds of millions and even billions of dollars, often relating to transfer pricing disputes with foreign multinationals. This year’s budget speech outlined plans for a new, high-level committee to scrutinize such cases, and promised to bring India’s transfer pricing regulations in line with leading practices from around the world. This includes more frequent use of 5-year advanced pricing agreements (APAs) that would also cover the previous 4 years. India’s previous government was criticized Corruption was not explicitly mentioned Having previously channeled their funds for the short-term nature of tax incentive in either the official budget or the speech, through tax-friendly countries, foreign schemes, making it hard for businesses to but is an issue near to the heart of the institutional investors holding shares in gain certainty over future revenue flows. Prime Minister, so further activity should listed Indian companies will now be able to In a bid to stimulate manufacturing, the be anticipated. set up offices in India without experiencing period for claiming a 15 percent investment Given its short time in power, the new an additional tax burden. This move should allowance on plant and machinery has been government has presented what observers enable closer links with local projects and extended from 2015 to 2017, while the annual have described as a ‘working budget’. If hopefully increase private investment in expenditure threshold for eligibility has been certain measures do not go as far as some infrastructure. The introduction of India’s reduced from US$16.6 million to US$4.2 would desire, they do form a statement of most awaited tax reform — the uniform million. Energy providers have also received intent to overcome the obstacles that have goods and service tax (GST) — is likely to a boost, with the deadline for claiming tax slowed India’s growth in recent years. With happen by the end of 2014. holidays pushed back to 2017. a clear mandate, the ruling Bharatiya Janata Subsidies for sectors such as food Overseas businesses do not want to fall party has the best chance in decades to and petroleum have sucked money out of foul of the Foreign Corrupt Practices Act turn the country into a major global player. government coffers, and these are set for and the UK Bribery Act, yet the endemic The coming months and years will tell us an overhaul, with significant reductions and nature of corruption in certain areas of Indian whether their strong words translate into finer targeting of beneficiaries. commerce makes it hard to comply, driving firm actions. many investors to avoid India altogether.

The Finance Minister has tried to give a general direction in the budget, and I hope that policy reforms will continue beyond the budget. The objective of attracting investments, both foreign and domestic, is much appreciated. There is focus on infrastructure, development and financing, and an effort to stimulate and create a vibrant corporate bond market. Various tax incentives have been provided to the manufacturing and infrastructure sectors. These measures are bound to have a buoyant effect on investor sentiments, promoting greater stability and investments in India.

What is worth appreciating is a break from a consumption-led budget to an investment-led budget. The budget appears progressive and sets the tone for attaining a higher growth trajectory, supplementing job creation and attracting investments for an economy grappling with multiple challenges. Also, there is an intent to modernize India. More focus is being laid on the use of information technology. Given the political mandate and stability, I am hopeful that the government Richard Rekhy will stay close to its defined targets. CEO, KPMG in India

Ringing in the changes The future for Latin America appears to be mobile. Yet concerns still remain over the ability to finance the infrastructure to deliver high-speed connectivity.

very time a TV camera panned to the emerged as the leading players across the crowd during the 2014 World Cup continent: Mexico’s América Móvil — which A fresh wave of regulatory Ein Brazil, a sea of spectators could has become the region’s largest wireless reforms is opening up networks be seen taking photos, texting, calling or carrier — and Spanish firm Telefónica. to new operators. surfing on their mobile phones. If this was Not everyone feels that such dominance the tournament where mobile finally arrived, is good for the consumer, with particular then Latin America was a fitting venue. With concerns over high prices. In response, mobile virtual network operators (MVNOs), mobile penetration of well over 100 percent many countries are now in the midst of a notably Virgin Mobile, which has signed an and a gradual easing of competition barriers, fresh wave of regulatory reform, with Mexico agreement with Telefónica to use the Vivo the continent is attracting the interest of and Brazil mandating network sharing, and network in Brazil and the Movistar network in both local and international operators eager a new media ownership law in Argentina Mexico. Virgin already offers similar services for a share of telecommunications revenue that will force the country’s largest media in Chile and Colombia. The Brazilian Post that is forecast to reach an eye-watering conglomerate, Clarín, to sell off dozens Office, Algar Telecom, Tesa Telecom and 1 US$167 billion by 2017. of operating licenses. Such moves will Sisteer are also in the frame to become This boom had its roots in the deregulation accelerate the convergence of fixed, mobile MVNOs in Brazil. of the 1990s and 2000s, when state-owned, and broadcasting content. monopoly providers were broken up, opening As network sharing grows in popularity, a Smartphones need smart networks markets to new entrants. Two giants have number of operators are bidding to become Latin America has largely skipped fixed line connections and moved straight to mobile, with the vast majority of customers choosing a prepaid option. Mobile internet usage is rising swiftly, fuelled by fast growth in smartphone ownership, which could reach almost 50 percent by 2017.2 However, fast broadband access is low compared to more mature economies, and governments and private providers are struggling to acquire the financing necessary to build next-generation fiber optic and 4G networks. Across Latin America, just 16 percent of people have direct use of broadband, two-thirds of which is through a fixed line [Teleco.com, 2014]. Insufficient bandwidth means that service tends to be slow, while an underdeveloped infrastructure often limits provision to the main cities. Affordability is also holding back growth, with broadband prices as much as eight times greater than the OECD (Organisation for Economic Co-operation and Development) average. Consequently, less than half of Latin Americans living in areas served by fixed broadband choose to pay for the service.3 Continued on page 20

1 Latin America Telecoms Market: Trends and Forecasts 2012–2017, Analysys Mason’s, 20 February 2013. 2 Latin America – Telecoms, Mobile and Broadband Overview, Budde.com, 2014. 3 IDB: LatAm Lagging Behind on Broadband Access, Financial Times beyondbrics, 14 May 2014. 18

Better connections Significant reforms to Mexico’s telecommunications regulations could pave the way for greater competition, improved service and lower prices.

exico’s América Móvil is a major offering new entrants the opportunity to the ambitious group is expanding rapidly, force in global telecommunications, lease bandwidth for mobile voice, data with its recent acquisition of Telekom Austria with a huge slice of the country’s and video. The government also intends to creating a platform for expansion into central M 4 domestic fixed-line, mobile and internet auction concessions for two new private and eastern Europe, where consumers favor market, and a leading position across Latin television networks. the same prepaid model that has been so America, a strategy that has earned it over successful in Mexico. A new era of competition? 270 million wireless customers.1 Along with Looking beyond telecommunications broadcasting giants Televisa and TV Azteca, With the limit on foreign investment in it forms part of a triumvirate that emerged telecommunications set to rise from Financial services could be another following deregulation in the late 1980s and 49 percent to 100 percent, and permitted beneficiary of the communications boom. early 1990s. foreign ownership of radio and television Less than a third of adults in Mexico possess However, such dominance is also a increasing from 0 percent to 49 percent, credit cards, but virtually everyone has a source of frustration for the many potential there is keen interest from private equity cellphone, so telecommunications companies competitors striving to make inroads into houses and other international investors have the chance to stake a claim in the Mexico, with the likes of Vodafone, Telefónica from the US, Canada, Europe (particularly growing mobile payments and insurance and others all failing to gain a significant Spain) and China. markets. A more robust infrastructure should foothold. US broadcasters and content producers also boost the prospects for services such An Organisation for Economic Co- currently serving their nation’s 38 million as call centers serving US businesses. operation and Development (OECD) study Spanish speakers see great potential in With a rising middle class and an average questioned this near-monopoly scenario, exporting to Mexico’s 113 million inhabitants. age of just 26, Mexico is undoubtedly estimating that its inherent inefficiencies This attraction is not just one-way, and becoming more attractive to external cost the Mexican economy as much as Mexican media groups already have a investors. Its ascension to the world stage US$25 billion a year — equivalent to nearly presence in the US, while continuing to sell has been further boosted by membership 2 percent of gross domestic product (GDP). to Hispanic markets across Latin America of the Pacific Alliance (a trade bloc that also The study also ranks Mexico at the bottom of and further afield in Spain, often using includes Chile, Colombia, Peru and now the OECD rankings for penetration for fixed, acquisitions and joint ventures to gain a Costa Rica) and the Trans Pacific Association mobile and broadband, with severe under- stronger foothold. Agreement, designed to enhance trade with investment in essential infrastructure and Convergence of media and content for the US and nine other Asia-Pacific member the highest prices of any emerging market.2,3 voice, data and video can only hasten the countries. All this may be about to change, as the race for Mexico’s consumers. Around half of The pace of reform is unlikely to be rapid, Federal Telecommunications Institute, known broadcaster Televisa’s revenues come from due to a cumbersome legislative process and as Ifetel, attempts to level the playing field cable, telephone and wireless, while the possible appeals from incumbent operators. through a number of groundbreaking reforms, country’s low internet penetration creates Nevertheless, the next few years should see in a bid to reduce costs and improve service ample space for multiple providers to grow Mexico’s telecommunications and media quality and coverage. One of the most concurrently. sector, so long a bastion against change, noteworthy innovations is the requirement Increased competition may eat into finally opening up. for the major players to share their networks, América Móvil’s domestic business, but

1 New Rules to Reshape Telecom in Mexico, The New York Times, 7 March 2013. 2 OECD Review of Telecommunication Policy and Regulation in Mexico, 30 January 2012. 3 Mexican Leaders Propose a Telecom Overhaul, The New York Times, 11 March 2013. 4 Slim eyes eastern Europe after Telekom Austria deal, Reuters, 24 April 2014.

© 2014 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. © 2014 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.

GROWTH MARKETS Ringing in the changes

Nevertheless, several countries in the Development is not restrained by national past few years, there remains an urgent region are rolling out ultra-broadband and borders. The Union of South American Nations need for additional capacity. With profitability 4G networks. Colombia is enjoying the (UNASUR) has a bold vision of a 10,000km- levels declining, operators are banking on quickest growth and the highest broadband long fiber optic broadband ring running new services such as applications, mobile penetration rate of 16 percent, thanks to its through its member states, although this banking and payments, machine-to-machine National Fiber Optic Project, which will deploy project is still at a nascent stage. connectivity and mobile healthcare to 15,000km of cable at a cost of around US$600 generate additional revenue.6 Expanding beyond traditional million. An ambitious national broadband The sheer demand for content should services plan to build a fiber optic backbone for the mean that, by the time you switch on to more remote regions of Peru is expected Given the low ownership of fixed-line the opening ceremony of the Rio Olympic to boost coverage to 9 percent by 2016.4 broadband connections, mobile broadband Games in 2016, many of the spectators will Chile has an extensive and growing cable may be the way forward for Latin America, be enjoying super-fast broadband functionality network able to transmit voice, internet and with 4G seeing impressive growth, albeit via 4G. The sun may have set on an exciting video, while Uruguay’s state-owned Antel from a small base. Brazil has been preparing World Cup tournament, but it is still rising on is pushing ahead with a nationwide fiber to itself technologically for the 2014 World Cup Latin America’s telecommunications sector. the home (FttH) expansion plan, aiming to and 2016 Olympic Games, and the number connect more than 720,000 households: of 4G lines was expected to quadruple from almost a quarter of the population. In Brazil, 2 million in 2013 to 8 million in 2014.5 Across Latin America, just Portuguese telecommunications giant Oi Financing remains a big obstacle. 16 percent of people have has a target of connecting 2 million homes Despite an estimated capital expenditure access to broadband. with FttH by 2015. of US$50 billion in mobile networks in the

4 Latin America – Telecoms, Mobile and Broadband Overview, Budde.com, 2014. 5 2014 Predictions for Telecom in Latin America, Nearshore Americas, Frost & Sullivan, 10 February 2014. 6 Mobile Economy Latin America 2013, GSMA, 2013. 20

Just the deal Indonesia’s M&A market is very much open for business, but, as David East explains, investors have to do their homework.

t’s not that surprising that Indonesia and regulatory environment, and opaque is viewed as the ‘go-to’ destination company ownership data that makes it David East is Head of “Iin South East Asia” remarks KPMG’s hard to identify targets.” Transactions & Restructuring David East from his 35th-floor office that “A degree of nationalistic sentiment has at KPMG Siddharta Advisory in overlooks the impressive sights of downtown crept into policy making, with regulations Indonesia. Jakarta. “Growth rates have been strong and heavily skewed in favor of local businesses. the middle classes are eager to spend their Many laws are unclear or apparently commonly used in shareholding structures, newfound disposable wealth.” conflicting, and reform of the judicial system hiding the identities of the real owners.” There is no disputing Indonesia’s is long overdue, making it hard for foreign When an owner does decide to sell, potential. Its 250 million population is owners to enforce contracts and agreements the deal process can be frustrating, as the only surpassed by China, India and the in Indonesian courts. Institutional corruption vendor is often a reclusive patriarch with US, while a rising GDP (currently US$900 is also endemic, although this is being limited or no prior transaction experience. billion) is set to become the world’s seventh tackled by the government’s Corruption A high proportion of deals abort during the largest by 2030. The economy also proved Eradication Commission.” cycle, due to overcooked pricing (Indonesia remarkably resilient to both the 1997 Asian Business owners are further restricted is still a seller’s market), transaction economic crisis and the larger, global one by an undeveloped insolvency framework structuring complications and deficiencies that followed a decade later. and uncompetitive labor laws that reduce in due diligence. There are signs that economic expansion flexibility in hiring and firing. But, as David Despite these obstacles, David feels has stalled somewhat, as demand for key points out, arguably the biggest challenge there is cause for optimism: “Subsidiaries commodity exports and inflows of much- is locating a suitable target: “It’s a bit like of these family groups are coming onto the needed foreign capital softened. According finding a needle in a haystack. Market market, and many have been performing to David, this coincided with a series of information is poor, with no obvious facility well despite limited management attention, domestic events that have had a ‘domino’ for searching for private companies, not all of leaving plenty of room for new owners to effect upon the economy: “First of all, the whom will have even filed their details. Many add value. My biggest tip is to be patient. government took the controversial decision companies exist within large, diversified, Indonesia is a very large country, so building to lift fuel subsidies and electricity tariffs. family-owned groups that share functions up relationships with intermediaries and On top of this, inflation has risen, along and resources, so it’s almost impossible to advisors inevitably takes time. Those that with interest rates and unemployment, know where one ends and another begins. persevere will find that it is well worth while a weakened rupiah has pushed up Corporate websites — where they exist — the wait.” the price of imports.” are thin on information, and nominees are Fortunately, such a slowdown is regarded as no more than a temporary correction at a time when other emerging economies are experiencing similar challenges. Needle in a haystack

When you take away foreign direct investment into greenfield or existing businesses, the amount going into mergers and acquisitions (M&As) is actually quite modest. David feels that this is not due to any lack of interest: “We see an abundance of foreign capital lining up, but investors are frustrated by a difficult legal

© 2014 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. Business insight Reading between the lines Uncovering the hidden truths about countries’ resilience to change

n a cautionary tale, a microfinance business countries’ resilience to environmental hazards encompasses state involvement with was puzzled at its inability to make headway such as earthquakes and floods, civil unrest business, macroeconomic and fiscal policies, Iin an African market that appeared to have and wars, famine and financial meltdown. regulations and laws, and food and energy excellent potential. Management had done And it evaluates the physical infrastructure, security. Finally, people and civil society its homework, checking out economic and the legal and regulatory framework, and the capability includes the skills and education demographic trends and evaluating banking cultural conditions necessary to improve of the workforce, entrepreneurship culture, and insurance penetration levels. It had living standards. health, civil stability, and gender equality. even sized up cellphone ownership and To ensure that it collects the right data, Looking beyond the numbers network coverage, given the importance KPMG seeks advice from a wide range of of mobile finance apps. Yet sales had still Most country analyses and indices tend to experts including policy makers, development failed to take off. focus on issues such as political climate, GDP, agencies, private organizations, and world- A detailed study of the latest Change imports and exports, key industries and tax renowned research group Oxford Economics. Readiness Index (CRI) would have revealed regimes. The CRI goes much, much deeper, The latest index includes 90 countries, the that this particular country scores extremely taking 70 secondary data variables, enhanced majority of which are high growth markets. low on ‘gender’, indicating that women’s by responses to 21 survey questions from The 2015 index will expand to 120 countries. rights are limited, for a number of social and country experts, to arrive at three main Although the overall rankings and religious reasons. Females are traditionally a dimensions that together measure a nation’s capability scores are insightful, they are main driver behind microfinance, yet in this capacity to manage change: enterprise not an end in themselves, but a starting case lacked the decision-making power to capability; government capability; and people point for more detailed discussions with buy products. and civil society capability. country and regional specialists, to gain a The CRI, launched in 2012 and new country Enterprise capability considers, among more intimate understanding of what it is rankings released in 2013, is designed to many factors, the flexibility of the labor like to do business in these countries. consider and understand the many risks facing market, diversity of the economy, openness Spotting the warning signs foreign and domestic investors, governments to overseas investment, innovation and R&D and communities as they strive to create base, physical infrastructure, and quality of A low country ranking on regulation and/or sustainable economic growth. It also gauges financial systems. Government capability public administration may raise alarm bells,

with further investigations uncovering a host generally those least capable of withstanding be a spur to overcome critical weaknesses. of frustrating bureaucratic restrictions that sudden shocks. South Africa may benefit from more relaxed hold back commerce. This may well extend However, the index also includes a labor laws and greater inclusiveness, while to property ownership, stretching out the few surprises. Chile is higher placed than Mongolia could diversify its economic base to time it takes to buy and take ownership of wealthier, more developed nations such as avoid becoming over-reliant upon resources. real estate. A poor score for human capital the US, France and South Korea, while the The Democratic Republic of Congo needs could signify an inadequate education and Philippines outperformed Spain, Portugal, a more business-friendly environment, and training system that leaves companies short Italy and Greece, four countries that suffered Sierra Leone should raise its skills base. of skilled workers. particularly from the Eurozone crisis. Of Lower income groups also struggle to Readers should not view scores in course, these findings do not mean that there adapt to changes, especially in societies isolation, as the different variables can is greater economic potential in Chile than where inequality is rife, which perpetuates a impact each other. For instance, a sound in the US, or that Italy and Spain should be weak labor market and increases the chance economic base and good financial systems avoided at all costs. But the scores should of civil strife. Private companies can play do not necessarily guarantee stability. Events open investors’ eyes to opportunities and risks. their part in resolving such failings, through such as the Arab Spring or the Ukrainian Haiti’s devastating 2010 earthquake hit a targeted social investment in education, uprising took many investors by surprise, country unable to cope with such a disaster, infrastructure and healthcare, to ensure while resource nationalism can occur in with limited healthcare and rescue resources, that they are funding activities that bring emerging nations (such as Argentina) as well and virtually no funds to rebuild. Chile and the greatest benefit to local communities, as developed ones (like Australia). Japan, however, both responded impressively resulting in greater corporate responsibility CRI findings show that per capita income to earthquakes. and citizenship. level and resilience are strongly correlated, Sri Lanka’s ranking of 47th has been due to richer nations having greater financial achieved despite only recently emerging resources and private sector capacity, from a protracted civil war, proving that, more stable and effective governments, with the right conditions in place, countries better trained workforces and stronger can quickly recover from severe shocks. To view a copy of the latest civil societies. Conversely, countries most Other governments can learn from these Change Readiness Index, go to impacted by conflict and political instability, or examples, to develop their own ability to kpmg.com/changereadiness with weak governments and civil society, are manage change. The index findings can also

The dimensions of capacity to manage change

CHANGE READINESS

Relates to broad – labor markets – financial sector capability of private – economic – infrastructure and state-owned diversification – informal sector enterprises – economic openness – trade policy and – innovation and r&d economic openness Enterprise – business environment capability

– macroeconomic – rule of law Relates to capability framework – government strategic of governmental and – public administration planning and horizon public regulatory and state/business scanning institutions relations – environment – regulation Government – food and energy – fiscal and budgeting security capability

Relates to individual, – human capital – gender societal and cultural – entrepreneurship – inclusiveness of growth determinants of – civil society – demographics People & civil capability – safety nets – access to information society capability – technology – health

© 2014 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. © 2014 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.

OFF THE CUFF With Ben Simpfendorfer

Eastern promise From Chinese e-retail to Indonesian punk rock, consultant and author Ben Simpfendorfer takes us on an exhilarating ride across the East.

Your latest book Rise of the New East powerful force such as Hollywood has had the capital Jakarta by establishing a strong is a fascinating guide to doing business to adapt its strategy. US films enjoy only web presence for its brand, without the across a huge geographical area. What a single-digit share of the film market in expense and risks associated with opening compelled you to write at this time? India, so American studios are linking up up new stores in unfamiliar places. Social with Indian partners to produce movies media also offers a new way to attract Multinational and mid-market companies in Hindi, Tamil and Bengali, featuring local customers. One unconventional example in more mature markets see enormous screenwriters and actors. UK retailer Tesco is Indonesian punk rock band Superman opportunities in a region of 50 countries has followed a similar path, entering into a is Dead, which has spent the past decade from Beijing to Istanbul containing over half joint venture with China’s second-largest or more acquiring a loyal following via the world’s population. But it is also getting retailer Vanguard to accelerate its expansion. Facebook, Twitter and other sites, enabling vastly more complex to do business in the it to compete with the major music labels East, with converging consumer tastes and The digital revolution knows no in a way that was previously not possible. ever more intense competition from local boundaries, and Eastern consumers businesses. Where once the ‘Asia strategy’ have shown a voracious appetite for The vast majority of the world’s Muslims used to mean a couple of offices in Hong both devices and content. How has this live in the East. What kind of approaches Kong and Singapore and a factory in China, impacted business strategies? are proving effective in penetrating this it now entails sites in every country and market? increasingly in second- and third-tier cities In countries with relatively little history as well. That’s a lot to cope with, on top of of cars and shopping malls, e-commerce Muslims represent possibly the last great which you have the impact of megatrends presents a tremendous opportunity to reach untapped opportunity, although they are such as urbanization and water shortages. tech-savvy consumers across multiple cities. of course spread across a vast range of Chinese fashion e-retailer Glamour Sales countries. Most of us immediately think As someone that works extensively has rapidly built an entire web business of Islamic finance and halal meat, but across the East, you have often spoken from its Shanghai base, with over half of other products also have considerable about the need to balance a global versus its sales coming from customers in mid-tier potential. Nicorette — which produces a local strategy. cities purchasing on handhelds from the aids to quitting smoking — noticed a spike comfort of their homes. In Indonesia, UK in sales around the religious month of Across the East, there are 270 cities with retailer Mothercare has expanded beyond Ramadan, so, consequently, focused much populations of over 750,000, each with a growing, affluent middle class eager for premium brands. Any company with serious ambitions therefore needs more locations and greater decentralization. With scale, however, comes complexity, and global businesses must relinquish a degree of control to give local management greater freedom, especially as these personnel better understand the tastes and preferences of their compatriots. But are national or regional managers the right people to make wider strategic decisions — such as whether to open new stores in China’s Anhui province or on Indonesia’s Sumatra? And although demand for established brands remains high, competition from emerging local products is also intensifying. Even a seemingly all-

Given the size of countries such food scares in China and other nations as China, India, Indonesia, Pakistan have caused a surge in demand for well- and Bangladesh, how do you see known names that are believed to be environmental megatrends affecting safe and reliable. Sales of organic beef business growth? from New Zealand and organic fruit and vegetables from the US are booming in Water shortages are arguably the biggest Hong Kong and Singapore, while wealthier concern in a region that is already short Chinese consumers are regularly making of this vital commodity. As people move the trek to Hong Kong to purchase milk in the millions to cities, they instantly powder and luxury goods, in the belief consume far more water, and with fast-rising that these are more likely to be genuine. demand from factories and farms, the kind Ultimately, the one constant in this vast of urbanization seen in 20th-century US, region is the unpredictability. The meteoric Europe and Japan is simply unsustainable. change in fortunes of Myanmar, from closed Technologies for filtering water from rivers military dictatorship to an attractive base should prove invaluable, while organizations for manufacturing and a growing consumer that can develop water-efficient supply market, demonstrates the importance of chains could gain a major cost advantage keeping a finger constantly on the corporate and reduce the chance of interruptions to pulse of the new East. production.

With consumers converging, mid-tier cities booming and local competitors of its marketing efforts around this period. In In countries with relatively little growing in strength, what kind of a another example, McDonald’s in Indonesia window exists for companies wishing history of cars and shopping took to wrapping the company’s traditional to invest in the new East? malls, e-commerce presents a golden arches by day and then unwrapping tremendous opportunity to reach them at night to signify the end of the fast. It is certainly getting pretty crowded, but there is always space for those that tech-savy consumers across Meanwhile HijUp.com is an up-and-coming multiple cities. online retailer selling fashion items for can identify specific tastes and tailor Muslim women, notably hijabs that cover appropriate products. Businesses should not the head and neck. underestimate the value of trust associated with established global brands. Recent

Ben Simpfendorfer their expansion strategies in China, the Middle East. Ben speaks Arabic, Southeast Asia and the Middle East. Cantonese and Mandarin. He has lived Ben Ben was the former chief China in Hong Kong for over a decade, but Simpfendorfer Economist for RBS and senior China started his career in the Middle East, is Managing Economist for JPMorgan where he living in Beirut and Damascus. He Director and advised some of the world’s largest writes a regular column for FT.com’s Founder of Silk financial institutions and multinationals. beyondbrics and features regularly Road Associates, a His forthcoming book, The Rise of the on the BBC World Service’s Business strategy consultancy New East, looks at managing growth Matters. Ben also partners with New based in Hong Kong and complexities in the Asia market York-based Global Strategic Associates with offices in Beijing and will be published by Palgrave and Dubai-based RHT Partners to and Melbourne. Ben Macmillan in mid-2014. His previous identify cross-border investment works with a range of book, The New Silk Road, examined opportunities between Asia and the multinationals and mid-sized firms on commercial ties between China and Middle East.

TRAVEL ADVISORY BUSINESS ETIQUETTE INDIA HAS MORE SOCIAL RULES Chennai,India than most countries, so be sure The ‘capital of the south’ has a distinct Tamil culture unlike any to prime up before your visit. First other Indian city meetings are invariably formal, with a strict observation of seniority. The pace of negotiations or discussions can be Still commonly referred to by its former British name, Madras, Chennai is India’s sixth slow, and high-pressure tactics should largest city, with a population of over 4.5 million. It is the capital of Tamilnadu, the be avoided. Due to the heat, suits are keeper of South Indian artistic and religious traditions, and the center of the Tamil rare, while women are advised to stick movie industry. to long dresses or trousers. A major transportation hub and one of the country’s major ports, Chennai’s economic MOBILE boom has been based on thriving automotive, software services, medical tourism, INDIAN CITIES have extensive mobile hardware manufacturing and financial services sectors. As the home of the Madras coverage, with Wi-Fi available in most Stock Exchange, the city is India’s second biggest financial base after Mumbai. hotels as well as a host of restaurants Hot, congested and noisy, Chennai boasts fine examples of Raj architecture, Christian and cafés. With some of the world’s pilgrimage sites and a flourishing arts scene reflected in highly distinctive dance, sculpture cheapest cellphone rates, you could and clothing. Recent years have added a new layer of cosmopolitan glamour in the shape even buy a local SIM card. of luxury hotels, shiny boutiques and contemporary restaurants. Climate Like many fast-growing metropolises, the city’s infrastructure has struggled to keep CHENNAI’S TROPICAL CLIMATE pace with rapid growth, but ambitious new projects such as the soon-to-be-completed is characterized by intense humidity metro should see Chennai striding confidently into the future. throughout the year. There are three major seasons — winter, monsoons and summer — with the hottest One sight you cannot miss is the breathtaking Kapaleeshwarar months coming between April and Temple in Mylapore, with its June, where temperatures can average rainbow-colored gateway tower as much as 40 degrees celcius. The and pillared pavilions dedicated north-east monsoon brings the to the god Shiva. The old British heaviest rainfall from October through Fort St. George harks back to to December, so winter is the best the days of Empire, set amid a jumble of narrow streets and time to visit, with pleasant sunshine, bazaars that make up George balmy evenings and moderate rainfall. Town. And no trip to India MONEY is complete without a visit to any of the numerous TRAVELERS CAN GET around 60 shops selling fabulous, Indian rupees (INR) to the US dollar natural-dyed, hand- (US$). Although ATMs are everywhere, loomed fabrics. maximum withdrawal limits can be low. Credit cards are accepted in all major hotels, shops and restaurants, but keep plenty of cash for those must-have purchases from markets, smaller shops and stalls. GETTING AROUND CONGESTION REMAINS CHRONIC and has been exacerbated by construction work on the new metro. When ordering a taxi, make sure you request an air-conditioned vehicle and call shortly before your trip to confirm, as service can sometimes be unreliable. A taxi from the airport to the city center costs approximately INR450 (US$8) and takes around 25–30 minutes. FURTHER INFO THE TAMIL Nadu Tourism Office is at 2 Wallajah Road; +9176995863, while KPMG’s office is at 10 Mahatma Gandhi Road; +914439145000

High growth markets global practice network Doug Ferguson Willy Kruh Elbert Waller Partner, KPMG in Australia Partner, KPMG in Canada Director, KPMG in the T: +61 2 9335 7140 T: +1 416 777 8710 Netherlands E: [email protected] E: [email protected] T: +31206 567009 E: [email protected] Christian Sailer Hiroshi Miura Partner, KPMG in Germany Partner, KPMG in Japan Rob Hyde T: +49 89 9282-1114 T: +81335485805 Director, KPMG in the UK E: [email protected] E: [email protected] T: +44 20 73113425 E: [email protected] Andre Guedel Richard Reid Director, KPMG in Switzerland Partner, KPMG in the UK T: +41 58 249 28 24 T: +44 20 73118956 E: [email protected] E: [email protected]

Mark Barnes Gautier Acket Partner, KPMG in the US Partner, KPMG in France T: +1 212 872 3199 T: +33155686064 E: [email protected] E: [email protected]

KPMG member firms in high growth markets

Anthony Thunstrom Ricardo Anhesini Oleg Goshchansky Partner, KPMG in Africa Partner, KPMG in Brazil Partner, KPMG in CIS T: +27116475423 T: +551121833141 T: +74959374435 E: [email protected] E: [email protected] E: [email protected]

Daniel Chan Dinesh Kanabar Hong Gi Bae Partner, KPMG in China Deputy CEO, KPMG in India Partner, KPMG in Korea T: +862122122168 T: +912230901661 T: +82221120520 E: [email protected] E: [email protected] E: [email protected]

Roberto Cabrera Suhael Ahmed Partner, KPMG in Mexico Partner, KPMG in MESA T: +525552468790 T: +97165742214 E: [email protected] E: [email protected]

Magazine contributors kpmg.com/socialmedia kpmg.com/app

KPMG would like to thank the following individuals for their contributions to this issue of High growth markets. Mark Bamber Nasser Sattar CEO, KPMG in Libya Head of Advisory, KPMG in The information contained herein is of a general nature and is not intended to address the Portugal and KPMG in Angola circumstances of any particular individual or entity. Although we endeavor to provide accurate David East and timely information, there can be no guarantee that such information is accurate as of the Partner and Head of Ben Simpfendorfer date it is received or that it will continue to be accurate in the future. No one should act on Transactions & Restructuring Managing Director and Founder such information without appropriate professional advice after a thorough examination of the KPMG Siddharta Advisory Silk Road Associates particular situation. Victor Esquivel Tim Stiles © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. Partner, KPMG in Mexico Partner and Global Chair KPMG International provides no client services. No member firm has any authority to obligate International Development Manuel Fernandes or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG Assistance Services Partner, KPMG in Brazil International have any such authority to obligate or bind any member firm. All rights reserved. KPMG LLP The KPMG name, logo and “cutting through complexity” are registered trademarks or Gaurav Mehndiratta Jean-Paul Thill trademarks of KPMG International. Partner, KPMG in India Partner and coordinator for Designed by Evalueserve. Hans Ouwendijk Francophone Africa, KPMG in Publication name: High growth markets: Unleashing Africa’s potential CEO, Vlisco Group France Publication number: 131548; Publication date: September 2014 IN OUR NEXT ISSUE ASEAN is open for business Covering a land area of 4.46 million km, ASEAN hosts almost 9 percent of the world’s population with a combined nominal GDP of more than US$2.3 trillion. Our next issue examines the global importance of this region and where the most lucrative opportunities exist.