The results of fDi’s investor intentions survey demonstrate that although companies are investing more cautiously, opportunities to harness the benefits of globalisation continue to endure across many regions and industry sectors.
fDi polled more than 150 multinational companies about their investment intentions for the coming year. The companies surveyed include the most active foreign investors and many of the largest companies in the world: the majority of respondents were senior-level executives at companies with more than 20,000 employees and nearly one-third have operations in more than 50 countries. The companies came from a range of sectors, including renewable energy, automotives, aerospace, chemicals, consumer electronics, financial services, hotels and tourism, IT and software, and life sciences.
Asia emerged as the top region of interest for multinationals seeking to expand abroad, with almost half of the companies surveyed planning to increase their investments in the region over the coming year; this was followed by Europe, where more than one-quarter of companies plan to increase investments; interest in Latin American investment ranked third; North America and the Middle East tied in fourth place; and Africa ranked sixth.
As a result of this push towards emerging markets in Asia, major multinationals such as IT services firm Cisco are following a strategy of continued expansion into China and India despite the global economic downturn. Cisco’s chief globalisation officer, Wim Elfrink, says that the firm will invest in a second wave of key emerging economies, including Mexico, Brazil, Saudi Arabia and Russia, and a third wave of approximately 24 select countries out of more than 100 markets where the company does business. “We look at globalisation far beyond cost and labour arbitrage, but rather tapping into global growth, innovation and talent,” says Mr Elfrink, who believes the company’s focus on emerging markets makes Cisco uniquely prepared to tap into global opportunities as the world market re-emerges from the downturn.
In other sectors, such as the automotive industry, John Parker, executive vice-president for Ford in Asia-Pacific and Africa, also remains positive about Asia, saying the car-maker’s investment programmes there are moving forward. “Given the economic climate, however, we will continue to conduct ongoing assessments to ensure that we are reacting appropriately to market conditions,” he says, adding that the company expects continued growth in Asia.
The investments that companies are making in the region will drive growth in the long term. Many companies will not get returns for some time, says head of multinational corporates at Barclay’s commercial, Chris van Niekerk, who regards his clients’ strategies of investment in the continent as a long-term bet. But Asia is less of a risk because things also look positive in the short term in relation to mature markets. “Though slower than previous years, China will still be well into positive territory in terms of GDP growth this year, so people with investment strategies in China will not be cutting back quite as much,” he says. Companies considering emerging markets in Asia are planning longer term than in some of their more developed economies, adds Mr Van Niekerk. “A number of sectors will want to keep their beachheads in emerging markets even if they slow down their investments, so that when the upturn comes, [they are] positioned for that.”
Emerging with promise
Asia is not the only emerging market to hold the attention of major multinationals. Nike’s director of corporate communications, Charlie Brooks, told fDi that the company is geographically well positioned in other emerging markets outside Asia, such as Russia, Turkey and South Africa, which complement the range of more established markets in which Nike is market leader overall.
Although some countries are focusing on Asia and emerging market expansion, the survey’s findings reveal that Europe is also seeing its fair share of investment, ranking second after Asia. Chief executive of Italian firm Eldor Electronics, Pasquale Forte, says that while going ahead with expansion plans in China for 2010/11, the company will focus in the short term on continuous investments in its R&D centre in Italy and manufacturing facility in Izmir, Turkey. “I am a little bit afraid personally for our expansion in China – of course, we have to follow our customers’ requirements but my feeling is that in a global downturn it is better to focus on our European base in Turkey and Italy because it is much easier to increase, decrease and adjust the rate of growth. There is less risk this way.”
Expanding existing operations abroad in this way was the most prevalent model for overseas investment to emerge from fDi’s survey results, reflective of the air of cautious investment that was encountered throughout the research. Joint ventures and traditional greenfield expansion both followed closely behind expanding existing facilities as secondary methods of expansion overseas.
Although emerging economies represent continuing opportunities for companies with strong balance sheets and available financing, investing in mature markets in the current economic conditions can also have benefits. Chairman and CEO of France Telecom’s Orange Group, Didier Lombard, says that the economic outlook for 2009 is favourable in order for the company’s ambition to increase and improve its portfolio of shops in countries such as Spain and the UK and other areas of its footprint. “We are able to expand into better locations and negotiate better terms,” he says.
Although some firms continue to invest abroad, deferred expansion plans were identified across all sectors and regions covered by the survey. More than half of respondents said that their overseas investment in 2009 would fall short of investments made in 2008. The commodities industries have been hit particularly hard because global economic conditions coupled with falling oil prices have severely hit the sector. Mining giant Rio Tinto’s chief executive of energy and minerals, Preston Chiaro, says investment depends on the commodity but expansion plans across the whole of Rio Tinto have been deferred simply because the demand for products is not there. “There are one or two commodities where demand remains strong – US coal is a perfect example – but in general expansion projects have been deferred,” he says.
A further one-quarter of respondents said that their levels of investment would remain constant in 2009 compared with that of 2008. Drugs company Novartis’ chief executive Daniel Vasella says that the company’s approach to investment has remained constant, with a focus on sustainable growth. “This implies not just strategic continuity, but also the agility to adapt and to act with creativity and speed. For example, we initiated a programme at the end of 2007 to create simpler structures and faster processes, while improving our productivity. The cost savings we gained from the programme allowed us to increase our investments into R&D and our target growth markets,” he says.
Blessing in disguise
One benefit of the economic situation is that marginal development projects abroad which were prospering in boom times are falling by the wayside due to lack of access to capital, perhaps minimising the risks of production capacity greatly over-shooting demand. More efficiently run greenfield projects may well be a by-product of this period of economic constraint. This sentiment is echoed by renewable energy company RWE Innogy chief Kevin McCullough, who believes a Darwinian approach is applied in times like these, particularly to the renewable energy sector.
“When you look at the entities globally who are contributing the biggest volume difference to the sector, they are typically the big utility companies because we have a solid balance sheet behind us so we can ride through this,” he says. “It is about who is strongest. For instance, a lot of the more entrepreneurial developers are struggling now because they are not serious and credible players in the eyes of the equipment manufacturers because they can’t get bonded, etc, so it is about survival of the fittest.”
Financing is the keystone to expansion and more than half of respondents said they would be relying on internal cash-flow for their overseas expansions. Constraints in available debt financing have resulted in firms such as Connaught Engineering changing their expansion strategy from last year because closing investments has become difficult. Chief executive Tony Martindale says he always anticipated going for a second round of fundraising to close at the end of 2008, but instead has experienced delays in closing because a lot of funds were taking a ‘wait and see’ approach. “I now have to give about 40% of the company up as equity because investors are looking for more security and much lower-risk investments,” he says, adding that he will not abandon expansion plans even though they have been delayed.
The survey shows that among those companies planning to invest abroad in 2009, the largest planned investments will be in R&D, sales, marketing and support. Jean-Philippe Courtois, European president of Microsoft International, says the firm will continue to focus on R&D as much as ever. The company invested more than $8bn last year, and plans to maintain that cycle of investment. This includes ramping up innovation assets across Europe, such as the European Search Technology Centre based in Paris, London and Munich, and its Zurich development centre. “We firmly believe that companies who invest in innovation during tough economic times will achieve a significant competitive advantage in the longer term, and Microsoft applies that strategy worldwide and in Europe,” says Mr Courtois.
A strong focus on sales and marketing, bourne out by the survey results, is something that international pharmaceuticals company Bausch & Lomb is focusing its investment plans on. Global president Flemming Ornskov says that the company has gone counter-cyclical by expanding rapidly while everyone else has been downsizing. “During the economic crisis we have expanded and moved more personnel into sales and sales-related activity, outsourced more of our IT, streamlined manufacturing, streamlined support functions, outsourced a lot of functions, and cut staff in human resources and finance to have more staff in sales-related activity. So it has been expansion in anything to do with sales and customers, and contraction in anything we can do with fewer people or more efficiently by outsourcing,” he says.
Tough times often lead to businesses asking for more strategic value from internal functions such as IT as they seek to adjust to changing market situations. This is necessary in order to emerge from the downturn in a stronger operational, competitive and economic position, says Alec Miloslavsky, chief executive of international IT services company Exigen: “Outsourcing has always been a very efficient and effective way to accomplish this with minimal organisational impact and maximum return on investment.”
An overwhelming majority of respondents said their investment criteria have not changed from previous years, which tallies with anecdotal evidence that companies are continuing to invest, albeit more cautiously. Like many multinationals, UK online gaming company Betfair has a long-term rolling investment plan over three years. The economic downturn has not altered existing plans for investment, says the head of Betfair’s international business, Niall Wass. “We don’t think we’re immune to recession and although we are keeping an eye on all the indicators, and monitoring things, we are pushing ahead with all our expansion plans.” The company has just entered the US market with a recent acquisition and says that in some ways it is regarding the downturn as an opportunity to invest further.
Freight forwarder FreightScan’s executive vice-president, Randy Richards, says his company’s expansion strategy has remained consistent going into 2009. FreightScan is seeing increased interest in its automated dimensioning products for cargo scanning as companies across the supply chain seek ways to improve operations and profitability.
Some sectors have been hit harder than others and even if expansion plans have been deferred, most companies surveyed consider the downturn temporary rather than an end to internationalising their businesses. Although there is a general expectation that there will be economic improvements in 2010, most companies will act sensibly and watch for signs that their sales markets pick up before they turn the investment taps on again.
Didier Lombard, Chairman and CEO, France Telecom, Orange Group
“There has been a significant shift in appetite for mergers and acquisitions in almost all markets and sectors during the past six to nine months. This does not mean that opportunities that require a more modest financial outlay will not proceed. Due to transactions in the past year, we will be launching commercial telecoms services in Armenia and Uganda in the coming months and have made small acquisitions to strengthen our position in mobile-to-mobile communications and online portals. We remain mindful of the need to position our business for the future while maintaining a comfortable debt level and strong cash flow, particularly in the current environment.”
Kevin McCullough, Head of RWE Innogy
“Last year we made the commitment to spend $1bn year on year until 2012. We are still on track to do that – investment criteria set at group level are still valid. All of our projects are progressing to plan. Our budget is committed on an annual rolling basis but we forward-plan over five years – and the annual commitment is always considered in light of the five-year rolling plan, which hasn’t changed. We are beginning to see the benefit of a falling market – turbines and major components were in big demand last year, which was pushing the prices up; for a business like ours it gives us a good commercial position from which to negotiate.”
Nani Becalli Falco, Head of GE International
“Globalisation remains a key strategic initiative for GE, given that we earn 54% of our revenues and have more than half of our employees outside the US. In spite of the economic slowdown, people around the world still need healthcare, energy, transport and clean water. And we at GE provide the infrastructure solutions that will help to drive development and growth around the world. The economic slowdown provides opportunities as well as challenges. Governments around the world are working to reflate their economies using stimulus packages and infrastructure projects, which make up a sizeable part of those packages.”
Bruce Mosler, chief executive, Cushman & Wakefield
“Our strategy is long-term and we’ve never been the most aggressive or largest acquisitor, we’ve always been careful to keep a low level of debt on the business. Clearly, acquisition has slowed and most of what we did was at the beginning of 2008. We are certainly going to be more cautious in our growth this year but will continue to take advantage of talent when we see it because talent drives a service business like ours. Before we close offices we will look at right-sizing offices, and that has already begun.”