In the world of FDI there are movers and shakers. There are companies that are the true trendsetters and players in the global game, making huge investments around the world, and it is their moves and projects that will determine the market for the next year and beyond.
These firms face huge challenges in 2011. Markets are gradually recovering, but it appears that most players are proceeding with extreme caution, fearing that even the slightest wrong move could cause a major setback for business. But sitting back and waiting is not an option. Companies will have to find ways to grow and sustain their operations in what will be one of the trickiest markets in decades. There are still opportunities waiting to be seized, but now it seems there are just as many potential pitfalls.
It is not always easy to get major corporations to reveal their strategies, as there is little incentive for them to let rivals know what they are doing. Seeveral major companies declined interview requests saying, as private firms, they do not reveal these matters. As an example, fDi Magazine was told that Wal-mart China’s CEO Ed Chan would not be available for an interview at a recent United Nations Conference on Trade and Development investment forum in Xiamen, China. When approached at the conference, an unoccupied Mr Chan refused to answer any questions and quickly fled the Wal-mart stand. His colleagues encouraged questions to be directed at his communications officer, Kathy Li, but she did not reply to queries.
Nonetheless, there are trends emerging, and moves from these companies rarely escape the public eye for long. According to data from greenfield investment monitor fDi Markets, the most active foreign investor since the figures started being collected in 2003 has been the German trading and retail company Metro. In the past seven years, this firm has made 406 investments on a truly global basis.
But in the past year, the firm appears to have slowed down the scale of its investments and expansion strategy. This year, fDi Markets shows Metro has remained largely in the European market, perhaps an indication of risk aversion. Apart from investments in Russia, Turkey and a few in eastern Europe, the data suggests that Metro has greater interest in more developed economies.
However, Metro’s CFO, Olaf Koch, told fDi Magazine that eastern Europe and Asia will figure largely in its expansion plans for 2011, specifically mentioning China, Russia and Turkey.
He says: “Our international activities account for more than 60% of [our] sales volume. We want to accelerate our international growth with a focus on eastern Europe and Asia. In particular, the fast-growing countries in Asia will play an increasingly important role in our expansion programme."
Mr Koch cites new developments in China that will take place near Beijing, the Yangtze River Delta, Shanghai and the Pearl River Delta with Guangzhou. He also notes the company's November entry into the Chinese consumer electronic market.
He says: “The consumer electronics retail market in China is likely to double over the next five years, and we see a potential of about 100 stores in the long term. Medium term, we want to invest more than €2.2bn per year in our corporate expansion, which will correspond to more than 125 new store openings.”
Not far behind Metro when it comes to foreign investment since 2003 are Ikea, IBM, Toyota and Carrefour, whose strategies have not been much different from the German retailer. Ikea remained predominantly in the European market, while Toyota was most active in the US and Canada. IBM’s recorded projects have been slightly more global, reaching all continents apart from Africa. But most noticeable was that none of these firms reported an investment in a more frontier type of market.
This is something that does not surprise Laurent Sansoucy, director at foreign investment consultancy OCO Global. In his opinion, even though economies around the world are showing signs of a return to growth and normality, the corporates are still very much shell-shocked and uncertain about the future.
He says: “The primary focus right now is on balance sheets. They will take very few risks and that is fairly pervasive. They are proceeding cautiously and preferring to be careful and preserve their cash. The investments that will happen will be smaller and less numerous.”
Daniel Malachuk, an independent management consultant and former partner at Arthur Andersen, has noticed that many of the big companies who do have a large amount of cash on their balance sheets are buying back huge quantities of their own stock. Just last month, telecommunications giant Vodafone purchased 15 million of its ordinary shares on the London Stock Exchange at an estimated 165p per share. Since September, Vodafone has purchased 458 million shares at a cost of £764m ($1.2bn). Mr Malachuk says share buybacks such as this are largely a result of the same uncertainty mentioned by Mr Sansoucy.
Mr Malachuk adds: “Now, and especially before, they thought their stock was cheap and there was no better use of their funds than to buy stock and increase their value. It’s mainly because they don’t know where else to put it. They’re not going to buy treasury bills, and there isn’t much out there that isn’t fraught with risk or uncertainty. So when in doubt, if you have a lot of cash, buy undervalued stock.”
The safe bets
Yet aside from a clearly defensive stance, the majors are still making moves and looking for places where they can grow their business. Figures show that two of the top destinations for FDI in the past year have been, unsurprisingly, China and the US. These two countries have been in the top two positions for years, and analysts suggest they have remained there in an uncertain climate because they are seen as the most secure bets for FDI projects.
Tellingly, several Chinese and US firms are making domestic investments as well, such as US-based home-appliance manufacturer Whirlpool, which has recently made a series of investments in Tennessee that will total close to $150m.
Mr Sansoucy argues this makes complete sense, as there is a significant aversion to risk among corporates at the moment.
He says: “Many big groups were re-interested in the US because it suddenly became a lot cheaper, especially with the value of the dollar dropping so considerably. Western Europe and the US have suffered less than eastern Europe, and now the East is considered very high risk despite low costs. Interestingly, China, India and Brazil are not viewed as risky in this climate.”
Metro's Mr Koch’s comments confirm this. He says the balance sheet is hugely important to his firm and that he saw a marked slowdown in global FDI in 2009, which picked up only moderately in 2010. Metro itself cut its capital expenditure to €1.5bn in 2009 and raised it to roughly €1.9bn in 2010. In August, this was increased to €2.1bn as confidence grew, together with a desire to accelerate its international growth.
On the destination front, Mr Koch is also largely in agreement with both consultants, apart from his interest in eastern Europe. When it comes to that region, he says it largely depends on the country, as resource-rich nations or those with good manufacturing industries are better positioned to recover than deficit-burdened countries such as Greece and Romania.
Yet what is generally accepted is that for the situation to change, and for companies to start taking more risks, there must be a clear confirmation that the world is exiting the economic crisis. This could be signified by more encouraging GDP figures or even a better unemployment rate in the US, but to date there has been nothing to trigger a new FDI rush. It remains a very confused and complicated situation and, for the time being, it appears that FDI will be smaller, simpler and more risk-averse.