Unpredictable consumer activity, disrupted trade finance, volatile currency markets, and inventory and supply chain headaches have not stopped some companies from sticking to investment plans made before the crisis. Despite reported project delays, many CEOs, CFOs and strategy directors see long-term opportunities to increase market share, renewed opportunities for mergers and acquisitions, and signs of returning consumer confidence.

“We spent two and half years getting ready for growth. Markets may have changed but we are still ready,” says François-Philippe Champagne, strategic development director for international engineering and project management firm AMEC. “Having a strong balance sheet and vision gives us a great advantage.”

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Positive signs

Once again, FDI is back on the corporate agenda, proving the investment class’s resilience to economic and financial disruption. Projects have been delayed or even cancelled, yet many companies are now breathing life back into plans drawn up long before the start of the troubles.

S Gopalakrishnan, CEO and co-founder of Indian IT consulting firm Infosys Technologies, says overseas investment slowed during the crisis – particularly in developed countries where some plans were postponed by up to a year – but that investment activity is now pretty much back to pre-crisis levels.

“We are already seeing signs of a recovery,” says Mr Gopalakrishnan, although he adds: “It will be a slow and muted recovery, and there will probably be bumps along the way.”

Whereas smaller companies’ investment plans have been more seriously affected by reduced consumer confidence and uncertain access to credit, many large firms have been able to take a long-term view of the economic situation, using balance-sheet strength to their advantage.

AMEC, for example, which operates in the natural resources, nuclear, clean energy, water and environmental sectors, is currently scaling up its overseas investment. Mr Champagne says: “AMEC’s investment strategy is about accessing new markets and building capacity. Our aim is to follow our customers, scaling up in key markets depending on opportunities, and going for geographic in-fill in countries such as the US, Canada and the UK.”

The company is currently working to build its operations in three regions – Australasia, Latin America and the Middle East. “We want to use our strong balance sheet wisely and increase our geographic footprint,” says Mr Champagne. Last year, for example, AMEC bought Australian engineering services company GRD for £52m ($79m). “The GRD purchase in Australia is part of this strategy to increase our footprint in these three regions,” he adds.

Similarly, Hans Tschuden, CFO of Telekom Austria Group, says that despite uncertain consumer confidence, Telekom Austria’s ongoing investment in central and eastern European will continue, since the group believes in the region’s long-term potential. Mr Tschuden says: “Some budgets have been tightened due to the financial crisis, and some investments have been delayed.”

Mr Tschuden is still cautious and believes the global economic situation will remain tough for the telecoms industry for at least a year. He adds that although Telekom Austria has a strong balance sheet, he does not currently foresee acquisitions outside its existing footprint.

 

A roller-coaster ride

Even some of the biggest players have been challenged by the turbulent financial markets of the past two years that brought some of the world’s largest banks – and even countries – to the brink of insolvency. During the worst months, the collapse of wholesale interbank lending reduced levels of trade finance putting huge cashflow pressures on companies in export industries.

Only businesses with large or very healthy balance sheets were able to continue investing in overseas operations. Rakesh Sharma, chief executive of international business at Bajaj Auto, one of India’s leading motorbike manufacturers, says: “Matters were definitely complicated by reduced levels of trade finance, which damaged international business confidence. Many markets simply became less receptive to new business, with fewer takers and greater uncertainty.”

Even so, by late 2009, the Indian auto company, which among other things assembles Kawasaki Ninja motorbikes for the Asian market, had already seen signs of economic recovery. Mr Sharma says: “Despite damaged consumer confidence and reduced levels of trade finance, we are seeing new business in our markets. For example, we are in talks to set up new assembly lines in Latin America and Africa. Just six months ago this would have been impossible.”

Damaged corporate and consumer confidence has not been the only problem. Companies with international operations have also had to contend with fluctuations in foreign-exchange markets that, Mr Sharma says, put them under huge financial pressure: “Managing dollar volatility in the past two years has been a roller-coaster ride.”

Unpredictable consumer confidence has also made it hard for companies to project foreign investment budgets for the next few years, and opinions vary on when global consumer confidence will return. One CFO thinks it may take until well into next year for the global economy to recover the ground lost.

“I don’t see the source of economic growth,” he says. “Recent positive developments are from government spending initiatives, but these will have to come down because of high levels of indebtedness. At the same time, I do not see corporate investment at a time when there is already an output gap caused by a lack of consumer confidence.”

Autogrill, which specialises in food and retail franchises on major transport routes, has already experienced important changes in consumer spending habits. Alberto De Vecchi, Autogrill’s CFO, says: “Clearly, consumers are more prudent in their spending in difficult times, but a profound impact on consumption patterns could be seen only in the event of a negative situation lasting for a much more prolonged period.”

He adds: “Our investment strategy depends more on the evolution of traffic volumes than straight GDP growth rates, although traffic can nonetheless be positively influenced by higher levels of economic activity.”

Bajaj Auto’s Mr Sharma also acknowledges changing patterns of consumer behaviour. “Consumers became more cautious as new factors started to influence buying decisions, such as rising fuel costs in some markets, which were not previously sensitive to this dimension.”

However, challenging operating conditions have created opportunities for large, well-known companies to increase brand dominance. Mr Sharma says: “We are seeing consumer caution as they concentrate on tried-and-tested brands.”

The CFO of a major international drinks company operating across 150 countries sees in the current market situation the possibility of increasing his brand’s dominance in both developed and developing markets. “We see the crisis as an opportunity. In the end, we are a market leader in our segment and with continued investment we will be able to gain market share.

“Consumer markets may be subdued,” he adds, “but the decision to buy a drink is a very different one from purchasing a new car or house, which may no longer be affordable. We do not expect a big drop in sales growth due to the crisis. Our market still has unbelievable opportunities for growth.”

One of the biggest operational headaches for CFOs has been anticipating future sales and production against a background of uncertain levels of long-term customer demand. Many report that both corporate clients and suppliers have been reducing the amount of stock they hold, leading to fears of ‘stock-outs’ when economic activity begins to pick up again.

Mr Sharma says: “Volatile demand put a great deal of pressure on Bajaj’s supply chain. We had to spend six months reorganising the pipeline stocks. I hope it’s now over.”

In the past few years, many companies have rationalised their supply chains. Michael Boy, CFO of Faber-Castell, one the major manufacturers of writing and drawing instruments, says, thanks to the company’s decentralised global organisation, it has not generally been affected.

While some European markets such as Spain or Italy were hit, Asia-Pacific recovered surprisingly fast, as did the Latin American countries. “We remain well financed and since the crisis hasn’t affected our balance sheet, we have been able to speed up some internal investments, for example, relocating production facilities and integrating our global supply chain,” says Mr Boy.

Other businesses have also continued to invest throughout the credit crisis. For instance, global lighting manufacturer Zumtobel recently replaced its production facilities in Spennymoor in the UK with a new, award-winning site ahead of an economic rally. Zumtobel’s CFO, Thomas Spitzenpfeil, says: “When the economy does start to pick up again we are well prepared to participate in the upturn without major further investments. Even better, we have done our homework to increase both productivity and cost position.”

 

Future prospects

Companies, particularly those with strong balance sheets, have also seen the potential for growth through mergers and acquisitions. For example, Autogrill made several acquisitions in 2008, including that of UK duty-free company WDF.

Autogrill’s Mr De Vecchi says: “We have worked intensively in the past two years to obtain synergies and efficiencies from integrating companies acquired in 2007 and 2008, and our results have been ahead of expectations.” However, he adds that most gains have come as a result of efficiencies created through business integration, rather than any significant improvement in the underlying economic situation.

Maurizio Borletti, founding partner of Italy’s Borletti Group, an investment company that has led acquisitions of business together worth more than E6bn in the past four years, also sees opportunities. “Although our planned investment budget dropped close to 40% during the crisis, today’s low target prices are a major incentive for mergers and acquisitions.”

Mr Borletti says low acquisition target prices are in part linked to the economic troubles but that they are also strongly influenced by reduced access to acquisition financing. He adds that this has two main consequences, increased competition between financial and strategic buyers, and the prospect of maintaining returns without increased dependence on debt financing.

Infosys is also aware of the current market potential for acquisitions. Following its December buyout of US specialist IT provider McCamish Systems, CEO Mr Gopalakrishnan says his company is prepared to consider further international acquisitions “valued at up to 10% of our annual revenues”.

Infosys is focusing on building operations outside India to meet the growing demand for its services in languages other than English. “We have built facilities in China, Mexico and are investing in Brazil. We are also investing in client-facing growth and sales in North America and Europe,” says Mr Gopalakrishnan.

He sees likely investments in 10 or more countries ranging across larger markets in Latin America, Asia-Pacific, the Middle East and Europe. “It’s about doing more with less, not about compromising quality,” he says, “and our biggest challenge right now is recruiting the right people.”

 

Prediction folly

However, acquisition opportunities can be hard to predict, meaning that companies with the flexibility afforded by strong balance sheets have a distinct advantage. AMEC’s Mr Champagne says: “Predicting future expenditures is made harder by the fact that we use differing models to enter a market – for example, joint ventures, alliances or mergers and acquisitions – depending on what opportunities are available.”

He adds: “We are flexible about the structure of our investments. Whether it takes the form of an alliance or acquisition depends on which is preferable for a particular market – and on what is available. M&A opportunities, for example, come and go, since it is the sellers that tend to decide the timing.”

Zumtobel’s Mr Spitzenpfeil is equally aware of the opportunities thrown up in the wake of the financial storm. He says: “We are geared to exploit growth potential based on our technological and marketing strength. The strategy involves both opportunistic M&A, if interesting targets are available, and organic growth. We are currently building sales capacity in China and the Middle East, and leveraging our manufacturing footprint in China.”

Confidence in Middle Eastern economic growth led Zumtobel to focus on Dubai, Abu Dhabi and Saudi Arabia, and Mr Spitzenpfeil sees no reason to change its plans to invest in existing businesses in the region, despite Dubai currently being a “challenging market”.

He says: “It is about expanding our customer base and participating in regional growth. Currently China is a clear focus, although there might also be interesting targets for acquisition in other countries.”

 

Long-tern focus

Companies remain focused on countries with clear long-term growth opportunities. For example, while Bajaj Auto saw a steep decline in Latin America during the crisis, Mr Sharma says sales in Africa have risen and in the second half of 2009, Asian sales also started to grow once more. “Overall, Bajaj registered sales growth of about 10% last year,” he says.

One of the biggest challenges for Bajaj will be deciding how to enter the Chinese market. To date, most of the company’s overseas investment has been focused on providing sales, marketing and manufacturing support to its partners, without direct equity investment.

Mr Sharma says: “We are assessing China, where we currently run solely as a sourcing operation. Further entry into China would require an investment, either in a joint venture or a 100%-owned company. We’ve yet to decide our strategy, including whether we want to go for the mass market or build a premium brand. The mass market may be an easier way to begin, but in the long term it offers lower profitability and sustainability.”

Company executives expect emerging markets to show a strong economic rebound. Stefano Bortoli, CFO at Lottomatica Group, the world’s leading lottery operator, says although the company’s FDI budget shrank during the crisis, the company is still expanding into China, Chile, Poland, Slovakia and Spain. “The main reason for overseas investment is our continuing search for new markets.”

Among emerging market countries, executives remain particularly interested in the potential for economic growth in the BRIC countries – Brazil, Russia, India and China. Mr Champagne says: “Brazil is still a big play for our industry and a natural extension for us.”

Like many other companies, AMEC also sees potential for economic growth in the Middle East. Mr Champagne adds: “We have built a presence in the Middle East and are now scaling this up. We like markets with long-term growth opportunities, not just short or medium term.”