Russia's Resurgence

Of all the four “BRIC” countries (Brazil, Russia, India and China) Russia is without doubt the most misunderstood and under-estimated when it comes to business, investment and trade. However, unlike the other three, Russia has in recent times experienced life as a global super-power and, with the developing world, notably China and India, becoming increasingly dependent on Russian supplies of energy, particularly oil and gas, it won’t be long before Russia resumes its place as one of the world’s largest economies.

According to Goldman Sachs, by 2050, Russia will be the fifth largest economy in the world (after China, USA, India and Brazil) and the single largest economy in Europe. Whilst badly hit by the global financial crisis in late 2008, Russia’s economy is now picking up across the board, with rising commodity prices (notably a recovery in the oil price), falling inflation, lower interest rates and a slow improvement in credit markets. Furthermore, Russia’s stock market is one of the top performing markets in the world so far this year, with a rise of over 50% since 31st December 2008. An early indicator of improving economic conditions in the months ahead.

Innovative, entrepreneurial and dynamic Australian companies should take advantage of Russia’s dependence on imports and foreign investment to research the local market, explore a wide range of opportunities arising from Russia’s rapid resurgence and develop a market entry strategy to take advantage of a wide range of opportunities in many areas, including the following:

Food and Agri-business
The sector of Russia’s economy which always attracts the most interest and opportunity for foreign players, including Australians, is the food, beverage and agri sector which was the worst hit by the collapse of the Soviet Union and offers the greatest upside potential, at least in the short to medium term. Food and beverage represents 45% of Russia’s total retail trade and is growing at over 19% per year (compared to approx 12% for non food sectors). As Russians become more affluent, they are demanding higher quality, trusted brands and greater variety which represents great opportunities for Australian players, particularly in:
- Meat
- Dairy
- Fruit and Vegetables
- Wine
- Technology

I was in St Petersburg late last year leading a BRIC+ Study Tour consisting of Australian investment advisers and researchers. Our group visited a large dairy and vegetable farm on the outskirts of the city and there was general surprise amongst the delegation at the outdated machinery and technology. This was specifically identified as an area of opportunity for foreign investment and expertise, and Australia has more to offer than most in this field.

Many Australian companies, in all sectors of our economy, survive and prosper in a tough, competitive and relatively small market due to the higher savings, efficiencies and margins that can be generated by leveraging world class technology, machinery, equipment and experience. It is in these areas that Australian companies have a significant competitive advantage overseas – the key is to start exporting our expertise, as well as our products, to the new developing economies of the world.

Financial Services
One area of particular interest to Australia is the rapid growth of Russia’s financial services sector, driven by sustained economic growth, increasing diversification and, as a result of the global financial crisis, a strong appetite for foreign capital through listings, Eurobond issues, private placements and other bank finance. As Russian companies seek to raise capital, so their need for international financial expertise grows – particularly in accountancy, legal and management consulting – and with up to 90% of Russian corporate deals based on English law, this represents significant opportunities for Australian firms. Macquarie Bank’s joint venture with Renaissance Capital to develop infrastructure advisory and fund management opportunities is a good example of what is possible, but there is room for so many more Australian firms and service providers.

Beyond the demand for capital, Russia’s financial services sector is growing domestically, driven by fast-increasing wealth, rapid bank sector expansion, and leading to the growth of services such as insurance, asset management and superannuation. Australian companies are well placed to benefit from these developments and as the Russian domestic market grows, so too does interest in financial services education, training and qualifications, together with a wide range of other opportunities in technology, software, compliance and back office systems.

Technology
As Russia’s economy grows, expands and continues to modernise and develop, the rising demand for international IT services will ensure that it continues to attract foreign IT and consulting firms from all over the world. This represents another important opportunity for Australian firms, particularly in the sectors where our economies overlap such as mining, oil and gas, agriculture and telecommunications. However, with increasing PC and internet penetration, a rapidly growing telecommunications sector and rising demand for software and IT services, Australian technology companies will find a wide array of opportunities to pursue in Russia’s expanding economy.

Conclusion
The current economic slowdown in Australia represents a timely and opportune reminder to innovative and entrepreneurial Australian companies to start leveraging their local success and experience by targeting the Big Rapidly Industrialising Countries of the 21st Century. Nothing could be more important in the search for new customers, new revenue streams and increasing profits, and now is the time for business leaders and entrepreneurs to beat a path to the door of the BRICs.

For the reasons above and others, Russia offers significant rewards for those brave enough to take the first step and my advice would be to:
- Do your research – a good place to start is Austrade’s dedicated Russian web site at: www.austrade.ru/eng
- Talk to Dan Tebbutt, Austrade’s active and passionate senior trade commissioner in Moscow
- Talk to other Australian companies who are doing business in Russia. Join the Australia Russia Business Council (www.arbc.org.au)
- Get some advice on how to develop a market entry strategy for Russia – Think Global can help
- Go to Russia – start in Moscow and St Petersburg, target companies in your sector and dispel some of the myths about Russians and Russia. You’ll be surprised.
- Get started – do something small, gain a foothold and then build up slowly and progressively. Create business targets and milestones, gain confidence and move forwards.

You may find it easier than you think!

(Extracts from the above article were first published in Dynamic Export, magazine of the Australian Institute of Export (July 2009): www.dynamicexport.com.au)

Best wishes

David Thomas

Follow the Money

Follow the Money!

Now here’s an historic photograph for you to reflect on!

Taken in Sao Paolo last week at the Group of 20 finance ministers and showing the four leaders of the BRIC countries (from left to right: Prime Minister Manmohan Singh of India, President Dmitry Medvedev of Russia, President Hu Jintao of China and President Lula da Silva of Brazil) at the end of their meeting to plan their response to the global financial crisis, it shows a united group of leaders ready to play their part in this week’s G20 summit in Washington.

If you need any more evidence to convince you that the world has significantly changed in the last few months, then look no further than this photograph. The BRIC (Brazil, Russia, India, China) countries, an idea put forward by Jim O’Neill, the Head of Economic Research at Goldman Sachs (and sometimes referred to as “a dream” or even “a marketing gimmick” by some sceptics) now represent a significant and irresistible force in geo-politics and the new global economy.

Between them they represent:
* 42% of the world’s population
* Over 30% of global growth (and rising rapidly)
* US$2.5 trillion in foreign reserves
* Over US$3 trillion in consumer expenditure
* Nearly 100% of the world’s chances of surviving the current financial crisis!

Within days of this photograph being taken, China announced its US$586 billion stimulus package, an investment in global growth which dwarfs anything we’ve seen from the developed world so far, makes a mockery of the US response to their own economic crisis, and is the largest single contribution to global growth ever seen. And no doubt there will be more to come!

The “powerful” G7 countries (made up of the United States, Britain, France, Germany, Italy, Japan and Canada) which are now all in recession, have a lot to do to remain relevant as a geo-political, economic and industrial force in the next few years, and we can only assume that the traditional lines of power and influence will be re-drawn in the next few days in Washington. Expect to see the BRIC Leaders playing a prominent role in the announcements that follow the G20 Summit.

As we’ve often said in the BRIC+ Program, just as Britain grew to dominance in the 1800s during the Industrial Revolution, and the US followed in the 1900s, this century will see the BRIC countries emerge to become dominant economic players. The pace at which this has happened is beyond anyone’s wildest imagination, and you will only see further acceleration in the coming weeks and months.

So, my challenge to you is this – become as familiar with the BRIC countries as you are with the US, UK and Europe. Its not too late to play a part in the new world that we now live in. But the risk is that you will play it too safe!

We are currently taking bookings from individuals, companies and associations looking to learn more about the BRIC countries via short one hour presentations and/or half day interactive workshops. There are a few dates available between now and February 2009, so take advantage of the opportunity to re-focus your business planning for next year by contacting support@thinkglobal.com.au.

Think China!

Think China!

I'm sure you'll agree that, if there's a recurring theme coming out of all sides of politics, economics, business and the media in the current financial crisis, it is that China really matters, right now! It mattered before (when we were all asleep!), it will continue to matter in the future (when the dust eventually settles) but, for the world's economic engine to keep turning over the next few months, China's ability to maintain and grow productivity, consumption and investment is now critical to everyone!

In recent weeks, since returning from Russia, I have been talking to friends and colleagues in China to understand and appreciate the factors, drivers and trends that will influence China's economy in the short term. The common view appears to be:

• China's economy is expected to slow from its 2007 GDP growth rate of 11.9% to a more sustainable rate of between 8% and 9% per annum but, far from being a disaster, this is actually regarded as a good thing, allowing for inefficient factories to be closed down, inflation to be brought under control and a more stable and accessible business and investment environment for both local and foreign players. In fact, the Chinese Government has, for some time, been trying to stop the economy from over-heating. Whilst not exactly planned, this slowdown is seen to be positive, beneficial and good for the long term
• China's stockmarkets (including Hong Kong) have been hit hard by the global financial crisis and now display valuations which are highly attractive to long term investors. Most importantly, China's commitment to utilise its massive reserves to a long term program of social and economic infrastructure (driven by the long term need to urbanise up to 700 million people in future years) is good news for the resources sector and will ensure that China's contribution to global GDP will continue to grow in 2009 and beyond. Long term investors will do well to retain their current positions and look for value in the current downturn
• China's Government understands, appreciates and accepts the role it has to play in working with Foreign Governments, banks and policy-makers to find solutions to the current financial crisis. The recent Asia-Europe Summit hosted in Beijing on 24th October was the first of many opportunities in which China will play a central role in concerted international action. The next will be at the G20 meeting in Washington on 15th November and surely the Anglo Saxon world will now have no option but to include China (and other emerging countries with strong fundamentals) in future discussions about global economic policy. That might be a good thing!

But let me leave all of the above to the numerous economic, political and business commentators who are certainly not short of views on how, whether, why and when China will lead us out of this mess, and what that means for the future of the world.

What I'd like to focus on is how everyone, now more than ever, must engage with China in business, investment and trade. Here follows four areas which present opportunities for you all to consider:

1. Follow the money
In response to an economic slowdown or recession in the US and other developed countries, China will now move from an export orientated economy to one that consumes most of what it produces. Markets of all types, shapes and sizes are growing in China and not elsewhere. Where else will you find a market on a steep growth trajectory with rising consumer demand?

The strategy now must be to move away from the first tier cities of Shanghai, Beijing and Shenzhen and start researching, networking and entering large second and even third tier cities with a strong value proposition and a commitment to long term success. Don't forget that there are over 200 cities in China with populations of over 1 million people. I recently heard of a large UK retailer whose sole China strategy is to target only one suburb of Shanghai because of its attractive demographics (young professional families), high spending power and extraordinary size (a population of 1.1m people living in the Shanghai suburb of Wujiaochang). It pays to do your research!

2. Reduce costs
China is, and continues to be, a great source of lower (not necessarily the "lowest") cost goods and services. Prices have been rising in Tier one cities but there has been a concerted effort by Government to move economic activity to new regional centres. For example, I heard today of a new technology park, specialising in incubating new environmental technologies being created in Tianjin (with 20 others planned in other cities) and there are many more plans to stimulate new economic activity throughout the country.

The conclusion is clear - don't think of China as one country. It's a massive network of diverse, autonomous and highly populous cities and regions. Before you start looking for even lower cost centres in other countries (Vietnam is the name that comes up the most) do your comparisons with China's second and third tier cities before you make your decision to ignore China. You may be surprised!

3. China goes global
For some time now, the Chinese Government has been encouraging local companies to "Think Global" and have offered cash grants, preferential loans, subsidies and even Government sponsored delegations to speed up the process. The recent financial crisis has only accelerated this process with my China based friends reporting on increased interest in mergers, acquisitions and investments in foreign companies offering the prospect of new markets and global connections.

Naturally, the largest companies lead the way (Lenovo's acquisition of IBM computers in late 2004 was the first high profile Chinese global play) but the SMEs will follow and offer significant potential for foreign companies seeking to take advantage of China's new role as a global investor. Why not put your hand up to potential Chinese suitors?

4. Innovation and creativity
The next phase in China's extraordinary transformation, which is now well under way, is its move into the higher end, creative, innovative and value adding technology, manufacturing and business solutions. There is a vast amount of creative and entrepreneurial energy in China looking for new outlets and this presents many opportunities for foreign companies and investors to participate on many levels. And the good news is that, in the current climate, the entry price is much lower than it was only 3 months ago!

As I'm often reminded, it's at times like this that new fortunes are made - don't hold back now!

How we can help
We have many friends, contacts and business associates operating in China and working with foreign companies looking for opportunities in all of the above areas. They have local clients, capabilities, connections and the resources to introduce you to many of China's most proactive and influential players. They can also assist with on-the-ground research, strategic planning and market entry. Please contact me at davidthomas@thinkglobal.com.au if you would like me to facilitate an introduction for you.

Please consider:
My friend and colleague, Dr Xisu Wang from Beijing (speaker, trainer, Thought Leader and author of China's first book on leadership practice) will be back in Australia from 21st to 28th November, including an appearance with me at this year's FPA Conference on the Gold Coast on Friday 21st November. There will be many opportunities to hear him speak on China from an insider's perspective during his visit and I encourage you all to meet him. Please contact us at support@thinkglobal.com.au if you'd like to hear him speak while he is here and we'll invite you to one of our events in Melbourne or Sydney.

Best wishes

David Thomas