Tuesday, April 26, 2011

Lexmark: Is It Finally Game Over?

Lexmark has missed the boat on many fronts; The office products industry has been consolidating rapidly due to oversupply of commodity products offered at incredibly low prices particularly in the low to medium segment.  Lexmark, which is an ex-IBM spin-off, has held its strong hold in relatively smaller verticals such as pharmacies, hotels etc. shielding itself from price wars and competition from larger rivals. 

Many larger rivals had approached Lexmark in past as a buyout candidate but the management with unreasonably high premium expectations combined with over-self confidence about the competitive sustainability of their business vis-à-vis HP/Canon/EDS, Xerox/ACS and Ricoh/IKON, refused friendly merger proposals.
In our opinion, Lexmark stands no chance of ever getting back to its heydays in the early to mid 2000s. I would even go as far as questioning the viability of their financial model as an independent vendor.

Lexmark simply does not have deep financial pockets, secured customer access in new markets particularly in non-US and emerging economies, a credible footprint of managed print services capabilities and captive channels of distribution. Unfortunately, given their reputation for passing on opportunities for merger combinations in the past, they may not even have any prospects for a friendly take-over anymore.

Despite management’s claims that this is a “tactical and not a strategic issue”, we would not buy the stock at this time. Accordingly shares of Lexmark (LXK) were falling 15.5%, to a recent $32.36 in midday trading, after the printer maker posted disappointing first quarter earnings before the market’s open this morning.

According to Down Jones News, The company’s first-quarter profit slid 13% on lower sales and higher costs, falling short of the company's expectations and prompting shares to erase their 2011 gains. The Lexington, Ky., company also said it has a number of partners that were affected by last month's earthquake and tsunami in Japan. The printer maker anticipates a minor impact to hardware availability for the remainder of the year. 

Lexmark--as with other technology companies, including rival Xerox Corp. (XRX)--had been benefiting from businesses spending on technology upgrades after delaying these purchases during the economic downturn. But the company attributed its disappointing quarterly results and outlook primarily to increasing restructuring costs.
"The first quarter of 2011 was one with both near-term marketplace and transitional challenges," Lexmark President and Chief Executive Paul Rooke said on a conference call with analysts. 

Lexmark said it suffered from increased nonmanufacturing costs. The company has been consolidating how it manages inventory in North America and then delivers it to customers. But it's been plagued by some transition issues that have resulted in higher-than-expected costs. 
The company said it will have to incur additional costs in the second quarter related to these transition issues but expects the challenges to be completely resolved in the second half of the year. 

"We believe this is more of a temporary issue, not a strategic issue," Rooke said in an interview. The news prompted shares to recently drop 16.7% to $31.88. The stock had been up 10% this year prior to Tuesday's trading.

Lexmark projected second-quarter earnings of $1 to $1.10 a share, below analysts' latest average estimate of $1.15. The company sees revenue growth dropping by a low single-digit percent from the $1.04 billion reported a year earlier. Analysts expected a small increase to $1.05 billion. 

The company said it believes the devastating events in Japan last month will have a minor impact to hardware availability in the second quarter. For the remainder of the year, there will be "some limited but manageable" hardware issues, which should be resolved by the end of the year, the company said. 

"We are incurring incremental product and engineering costs as we resolve supply issues and these costs will be reflected in our guidance," Gamble said. 
Lexmark reported earnings of $83.3 million, or $1.04 a share, down from $95.3 million, or $1.20 a share, a year earlier. Excluding restructuring- and acquisition-related charges, profit fell to $1.14 a share from $1.35. Revenue slipped 0.8% to $1.03 billion. 

Standard & Poor's Equity Research slashed its investment rating on Lexmark to hold from buy, noting lower printer hardware sales mixed with a flat performance from supplies hindered results.

The disappointing segments overshadowed growth among software sales. S&P slashed its price target to $34 from $45.  Lexmark had seen gains from its $280 million acquisition of Perceptive Software last May, which allows Lexmark to offer a software platform as a core component of its existing services.

The company in February projected earnings of $1.18 to $1.28 a share, beating analysts' earnings forecasts at the time, on revenue of $1.05 billion. 
Imaging solutions and services revenue, which makes up the bulk of the total, slid 3% year on year, and hardware revenue slipped 12%. Gross margin widened to 37.6% from 36.9%. 

Rooke said the best way to analyze the 12% drop in hardware revenue is to differentiate between core and legacy products. Sales of laser and business inkjets rose from a year earlier, but the company continued to struggle with declining sales of its legacy, low-end consumer inkjets. The company also missed some channel sales due to aggressive competitor promotions, many of which it declined to compete with. 

"We saw very encouraging signs in our core strategic areas, which were masked by our legacy, consumer business that we're exiting," Rooke said.

Friday, April 22, 2011

Xerox Q2 Results Average, but Upside Catalysts Remain Elusive Despite ACS

Xerox announced today first-quarter 2011 results that include adjusted earnings per share of 23 cents.  "Our results in the quarter reflect solid progress in scaling our services business while maintaining our leadership in document technology," said Ursula Burns, chairman and chief executive officer. 

First-quarter revenue of nearly $5.5 billion was up 2 percent on a pro-forma basis with ACS in the company’s results.  Revenue from technology, representing the sale of document systems, supplies, technical service and financing of products, was flat.  Revenue from services was up 5 percent on a proforma basis, and represents the company’s business process, IT and document outsourcing offerings.  

Signings for Xerox’s services totaled $3 billion in the first quarter and were up 3 percent on a trailing 12-month basis.  "In the past year, we transformed not only our business into a leading player in the services space, but also our business model with growth largely driven from an increasing annuity stream," added Burns. "Multi-year, multimillion dollar services contracts generate long-term revenue.  And, we fueled this annuity in the first quarter through growth in both services revenue and signings while building a strong pipeline for future business.  
“We continue to hold the number-one revenue market share position for document technology, and strengthened this position during the first quarter with a 27 percent increase in installs of our midrange color systems and 19 percent growth in high-end color systems,” said Burns.

Xerox also commented on the business impact from the earthquake in Japan. “We are focused intently on minimizing any disruption in providing products and supplies to our customers,” said Burns. Xerox expects second-quarter 2011 GAAP earnings of 18 to 21 cents per share. Second-quarter adjusted EPS is expected to be 23 to 26 cents per share.  Full-year 2011 GAAP earnings are expected to be 89 to 94 cents per share.  Full-year adjusted earnings are expected to be $1.05 to $1.10 per share.  

Xerox was trading at $10.22 a share after dropping more than 5% on intensifying competition, slowing industry wide unit volume growth, continued mix shift towards lower-margin services contracts and incremental supply chain costs (particularly in 2Q) related to Japan to pressure near-term results.

Autonomy Q1 Results - Revenue Ahead of Consensus, Earnings Light

Autonomy (LON:AU.), a leading vendor in the high-growth markets of Enterprise Search, eDiscovery and Content Management., has announced a strong quarter with good growth in revenue, profits and other key metrics today.  Revenues were $220 million ahead of consensus $216 million,  PBT (adj.) $95 million ahead of consensus $90 million, operating margin (adj.) 
43% vs consensus 42%.

The franchise enjoyed strong year-on-year growth in core IDOL business, including OEM growth (organic) of 28%,  Cloud growth in recognized revenue (organic) of 17%, and product growth (organic) of 17% while gross margins up to 88% in Q1 2011 from 86% in Q4 201.

Dr Mike Lynch, Group CEO of Autonomy said “Q1 was a strong quarter for Autonomy in which we continued to execute well with good growth in revenue, profits and other key metrics. We are excited by the fact that the transition to the cloud has continued apace, seen in the combination of growth in recognized cloud revenues of 17% and growth in new signings evident in the rising commit number”

Revenues came in ahead of consensus, but earnings were a little light. DSO, at 102 days, is a concern to us given the faster pace of growth in receivables relative to revenue growth. While top-line growth was impressive, we continue to be worried about the quality of earnings. 2010 was a disappointment in our view.  Operating costs rose faster than we and the market expected, and revenues/gross profit expectations were lowered during the year. This compared to many of the industry peers delivering better than expected results. Underlying metrics, such as cash conversion, working capital outflows and growth in trade receivables remain poor relative to our expectations. We will continue to demand better execution and cash management.

The company’s strong IDOL technology, coupled with an extensive catalogue of data repository connectors, provides high barriers to entry, which we believe should allow the company to sustain its profitable growth for the foreseeable future. In addition, management has a strong track record of value creation through the continued signing of OEM relationships and strategic acquisitions.

Lastly, Autonomy is one of the largest independent ECM vendors in the world and is provided with many attractive acquisition candidates to grow even faster organically. However, Microsoft (NASDAQ:MSFT) SharePoint remains as a major threat to the company.

Wednesday, April 20, 2011

Private equity funds search for Turkish companies

Domestic and foreign investment funds are seeking companies to take in a partnership in Turkey. Turkey has increased its attractiveness for foreign investors, despite the global crisis as the OECDs highest growth market and only third in the world after China and Argentina in 2010. A new commercial code has been passed early this year to further improve corporate transparency and governance while making it easier for small to medium size firms to file for IPOs.

Private equity funds, which become partners to promising companies, have already revealed investments worth $283 million in 24 transactions in 2010.
The investment of these funds is expected to reach $3 billion by representing a 10-fold increase in 2011. A total of four acquisitions have already been completed in the first two months of the year. The first three transactions were made in the health, retail and food sectors. There are already many large PE firms operating in Turkey chasing big deals with equity checks of $150 million euros or less. It is interesting to note that more interesting PE investments have been realized so far by local PEs in the up to $50 million euro range.
The number of transactions and their volume are expected to increase this year, according to Demet Özdemir, a partner in Ernst & Young.
Turkey first met with private investment funds in 1995 and these firms have become an important contributor to the domestic market. The investment duration of these funds providing partnership by investing capital in companies varies between five to seven years, often with annual extensions.
But the biggest acquisition of last year was revealed by a Turkish investor. Esas Holding became a partner in AFM Theaters and Mars Entertainment Group by investing $82.4 million.

Turkish mergers reach $30 billion in 2010

The volume of mergers and acquisitions, or M&As, in Turkey approached $30 billion in 2010, according to estimates from Ernst & Young.
The figure is close to the $29 billion predicted by Deloitte earlier this month.
Ernst &Young’s ninth report on M&As in Turkey was released at a press conference in Istanbul on Wednesday. According to the report, 241 M&A transactions took place in Turkey last year, representing a rise of 108 percent.
Deals whose value was disclosed totaled $26.4 billion, a significant rise over 2009’s $3.9 billion. “Considering deals whose value have not been disclosed, we predict the total deal volume to be at around $30 billion,” Ernst &Young said in a statement.
Turkey has increased its attractiveness for foreign investors, despite the global crisis as the OECDs highest growth market and only third in the world after China and Argentina in 2010. Despite there is a general election, we expect the M&A volume to reach again $30 billion this year.
Best year since 2005
The report shows that 2010 saw the highest amount of deals since 2005. The average size increased to $197 million, from the previous year’s $76.4 million.
Domestic investors accounted for 63 percent of the deal volume, a trend that runs contrary to the dominance of foreign investors between 2005 and 2008. Foreigners are staying away from the sales of government assets due to “transparency concerns” amid the global crisis, Cantekinler said, according to Bloomberg News.
The highest paid premium deal of the year was Ageas’ purchase of 32% of Aksigorta from Sabanci Holding for $710 million, a deal that I have made. The biggest deal of the year was BBVA’s acquiring nearly a quarter of Garanti Bank for $5.8 billion, followed by OMV’s acquisition of Petrol Ofisi shares for $1.4 billion.
Eight of the top 10 deals were electricity grid distribution privatizations, all won by domestic companies.
In deal volume, the energy and finance sectors topped the list, while in the number of deals, energy and food were the top two sectors.
“Private equity funds, which signed only 10 deals in 2009, accounted for 24 deals last year,” Ernst & Young said. “The volume of these investments totals $283 million, regarding deals that were disclosed.”
The report noted that this year bridges and highways, the national lottery, Istanbul’s natural gas distribution network and its ferry company are among expected privatizations.

Is your emerging-market strategy local enough?

This is an excellent article by McKinsey Quarterly on what it takes to be successful in emerging markets. I have seen many great franchises hugely successful in the developed markets that tried to force-fit the same exact success formula in the emerging markets and they failed miserably. Take a look at Walmart in Germany or Korea. Take a look at Best Buy in Turkey just to name a few. The diversity and dynamism of China, India, Brazil and Turkey defy any one-size-fits-all approach. But by targeting city clusters within them, companies can seize growth opportunities. There is no one-size-fits-all strategy for capturing consumer growth in emerging markets. What’s clear, though, is that traditional country strategies and other aggregated approaches will miss the mark because they can’t account for the variability and rapid change in these markets. As the battle for the wallet of the emerging-market consumer shifts into higher gear, companies that think about growth opportunities at a more granular level have a better chance of winning.
Creating a powerful emerging-market strategy has moved to the top of the growth agendas of many multinational companies, and for good reason: in 15 years’ time, 57 percent of the nearly one billion households with earnings greater than $20,0001 a year will live in the developing world. Seven emerging economies—China, India, Brazil, Mexico, Russia, Turkey, and Indonesia—are expected to contribute about 45 percent of global GDP growth in the coming decade. Emerging markets will represent an even larger share of the growth in product categories, such as automobiles, that are highly mature in developed economies.

Figures like these create a real sense of urgency among many multinationals, which recognize that they aren’t currently tapping into those growth opportunities with sufficient speed or scale. Even China, forecast to create over half of all GDP growth in those seven developing economies, remains a relatively small market for most multinational corporations—5 to 10 percent of global sales; often less in profits.

To accelerate growth in China, India, Brazil, Turkey and other large emerging markets, it isn’t enough, as many multinationals do, to develop a country-level strategy. Opportunities in these markets are also rapidly moving beyond the largest cities, often the focus of many of these companies. For sure, the top cities are important: by 2030, Mumbai’s economy, for example, is expected to be larger than Malaysia’s is today. Even so, Mumbai would in that year represent only 5 percent of India’s economy and the country’s 14 largest cities, 24 percent. China has roughly 150 cities with at least one million inhabitants. Their population and income characteristics are so different and changing so rapidly that our forecasts for their consumption of a given product category, over the next five to ten years, can range from a drop in sales to growth five times the national average.

Understanding such variability can help companies invest more shrewdly and ahead of the competition rather than following others into the fiercest battlefields. Consider Brazil’s São Paulo state, where the economy is larger than all of Argentina’s, competitive intensity is high, and retail prices are lower than elsewhere in the country. By contrast, in Brazil’s northeast—the populous but historically poorest part of the country—the economy is growing much faster, competition is lighter, and prices are higher. Multinationals short on granular insights and capabilities tended to flock to São Paulo and to miss the opportunities in the northeast. It’s only recently that they’ve started investing heavily there—trying to catch up with regional companies in what is often described as Brazil’s “new growth frontier.”

As developing economies become increasingly diverse and competitive, multinationals will need strategic approaches to understand such variance within countries and to concentrate resources on the most promising submarkets—perhaps 20, 30, or 40 different ones within a country. Of course, most leading corporations have learned to address different markets in Europe and the United States. But in the emerging world, there is a compelling case for learning the ropes much faster than most companies feel comfortable doing.

The appropriate strategic approach will depend on the characteristics of a national market (including its stage of urbanization), as well as a company’s size, position, and aspirations in it. In this article, we explore in detail a “city cluster” approach, which targets groups of relatively homogenous, fast-growing cities in China. In India, where widespread urbanization is still gaining steam, we briefly look at similar ways of gaining substantial market coverage in a cost-effective way. Finally, in Brazil we quickly describe how growth is becoming more geographically dispersed and what that means for growth strategies.

Targeting the right city clusters in China
By segmenting Chinese cities according to such factors as industry structure, demographics, scale, geographic proximity, and consumer characteristics, we identified 22 city clusters, each homogenous enough to be considered one market for strategic decision making. Prioritizing several clusters or sequencing the order in which they are targeted can help a company boost the effectiveness of its distribution networks, supply chains, sales forces, and media and marketing strategies.

More specifically, this approach can help companies to address opportunities in attractive smaller cities cost effectively and to spot opportunities for, among other things, expanding within rather than across clusters —a strategy that requires a less complex supply chain and fewer partners. Companies that nonetheless want to expand across clusters may find it easier to target 50 to 100 similar cities within four or five big clusters than cities that theoretically offer the same market opportunity but are dispersed widely across the country.

Another major benefit of concentrating resources on certain clusters is the opportunity to exploit scale and network effects that stimulate faster, more profitable growth. Because most brands still have a relatively short history in China, for example, word of mouth plays a much greater role there than it does in developed economies. By focusing on attaining substantial market share in a cluster, a brand can unleash a virtuous cycle: once it reaches a tipping point there—usually at least a 10 to 15 percent market share—its reputation is quickly boosted by word of mouth from additional users, helping it to win yet more market share without necessarily spending more on marketing.
Here are four important tips to keep in mind when designing a city cluster strategy for China.

Focus on cluster size, not city size

It’s easy to be dazzled by the size of the biggest cities, but trying to cover all of them is less effective for the simple reason that they can be very far from one another. Although Chengdu, Xi’an, and Wuhan, for example, are among the ten largest cities in China, each of them is about 1,000 kilometers away from any of the others. In Shandong province, the biggest city is Jinan, which is barely in the top 20. Yet Shandong has 21 cities among China’s 150 largest, which makes the area one of the five most attractive city clusters. Its GDP is about four times bigger than that of the cluster of cities around and including Xi’an, as well as three times bigger than the cluster of cities surrounding Chengdu.

Look beyond historical growth rates

The growth of incomes and product categories is another variable that must be treated in granular fashion. Extrapolating future trends from historical patterns is particularly suspect—however detailed that history may be—because consumer spending habits change so rapidly once wealth rises.
In some clusters, many people are starting to buy their first low-end domestic cars; in others, they are upgrading to imports or even to luxury brands. We expect sales of SUVs to increase at a 20 percent compound annual growth rate nationwide in the next four years, for example, but to grow as quickly as 50 percent in several cities and, potentially, even to decline in some where penetration is already deep. Similar or even sharper variance held true in almost every service or product category we analyzed, from face moisturizers to chicken burgers to flat-screen TVs. Yogurt sales in some cities are growing eight times faster than the national average.
The Shenzhen cluster has the highest share (90 percent) of middle class households—those earning over $9,000 a year. In other clusters, such as Nanchang and Changchun–Harbin, more than half of all households are still poor. As a result, people in the Shenzhen cluster are already active consumers of many categories, and the potential for growth is fairly limited. In the poorer clusters, many categories are just emerging, as larger numbers of people pass the threshold at which more goods become affordable. From a strategic viewpoint, the richer cluster could still be a major growth market for premiumgoods but not for most mass-market ones.

Don’t be fooled by generalities

Talking about Chinese consumers and how they shop is a bit like talking about European consumers. While some generalizations may be fair, certain very strong differences, even within regions, go well beyond the already significant economic variance. Guangzhou and Shenzhen, for example, are both tier-one cities, located in the same province and just two hours apart. But Guangzhou’s people mainly speak Cantonese, are mostly locally born, and like to spend time at home with family and friends. In contrast, more than 80 percent of Shenzhen’s residents are young migrants, from all across the country, who mainly speak Mandarin and spend most of their time away from their homes. To be effective, marketers will probably have to differentiate their campaigns and emphasize different channels when reaching out to the people in these two cities. That’s why we suggest managing them in different clusters, despite their proximity.

The need to localize marketing activities also results from the limited reach of national media. China has over 3,000 TV channels, but just a few are available across the country. In some areas, only around 5 percent of consumers watch national television. Other media, such as newspapers and radio (and of course billboards), are even more local.

Very few companies can craft their entire strategy at the level of a cluster—those that do are usually its regional champions. But with differences such as the following common, some tailoring is critical:

·        Every second consumer in Shandong believes that well-known brands are always of higher quality, and 30 percent are willing to stretch their budgets to pay a premium for the better product. In south Jiangsu, only a quarter of consumers preferred the well-known brands, and only 16 percent were willing to pay a premium for them.
·        In the Shenzhen cluster, 38 percent of food and beverage shoppers found suggestions from in-store promoters to be a credible source of information, compared with only 12 percent in Nanjing.
·        In Shanghai, 58 percent of residents shop for apparel in department stores, compared with only 27 percent of Beijing residents.
With such diversity common, even merely fine-tuning the marketing mix and channel focus by cluster can pay enormous dividends.

Allow your clusters to be flexible

Some companies may want to merge or divide clusters for strategic-management purposes. A company could, for instance, merge geographically nearby clusters, such as Guangzhou and Shenzhen or Chengdu and Chongqing, if its supply chain was well positioned to manage these proximate clusters as one. Other companies, highly driven by the media market, would find it sensible to split the Shanghai cluster into subclusters, because some markets within it are still quite different in their TV habits and other choices. By contrast, people in certain clusters, such as Chengdu or Guangzhou, watch similar TV shows across the entire cluster, so intracluster expansion allows companies to make more effective use of the media spending needed to attract consumers in the big cities.
The actual number of submarkets a company opts for will depend in practice on its needs. That number should be manageable—most likely, 20 to 40. Fewer wouldn’t be likely to produce the required degree of granularity, though a company might have logistical reasons for taking this approach. More would probably be too many to run effectively.

Cost-effective market coverage in India
Often, the challenges of accessing consumption growth cost effectively are even greater in India than in China because India is less urbanized and at an earlier stage of its economic development. Companies would need to reach up to 3,500 towns and 334,000 villages, for example, to pursue opportunities in the 10 (of 28) Indian states that by 2030 will account for 73 percent of the country’s GDP and 62 percent of the urban population.
To allocate financial and human resources smartly and make things more manageable, companies need to walk away from averages and adopt more granular approaches. Some companies will be well served by focusing on 12 clusters around India’s 14 largest cities. Those clusters will provide access to as much as 60 percent of the country’s urban GDP by 2030, when the 14 largest cities are likely to account for 24 percent of GDP.
True, India’s major clusters won’t cover as much of the economy as those in China, where they will encompass 92 percent of urban GDP by 2015. Yet a hub-and-spoke approach in India should provide similar opportunities to optimize supply chains, as well as sales and marketing networks. An established technology player formerly operated in 120 cities all over India, for example. Recently, it shifted to focusing on eight clusters with a total of 67 cities, which still gave it access to 70 percent of its potential market. One benefit: customer service costs fell from a rapidly growing 9 to 10 percent of sales to a more acceptable 5 percent.

Alternatively, a company might improve the economics of its Indian business by focusing on a handful of states, an approach recently adopted by a retailer that had previously been pursuing a national footprint. Another company, this one in the consumer goods sector, recently decided to pursue opportunities in eight cities where consumers earn over $2,500 a year—more than twice the average for India—and the retail infrastructure suits its products nicely. Without this more granular analysis, the multinational would have stayed on the sidelines in the mistaken belief that Indian consumers weren’t ready for its products. It would therefore have missed the opportunity to challenge a competitor rapidly gaining the lead in those markets.

Seizing new regional opportunities in Brazil
In contrast to China and India, Brazil has been open to multinationals for decades. But during much of that time, most large companies in sectors such as consumer packaged goods focused on the southern (and most affluent) parts of the country. With just over half of the national population, this region includes São Paulo city and state, Brazil’s financial and industrial center.

As economic growth accelerated in recent years, many consumers started upgrading to more sophisticated products. But growth has also been moving beyond the south and a few large cities, becoming more geographically dispersed. In the populous northeast, for example, income per capita is only half of its level in São Paulo, but the economy is growing faster than it is elsewhere in Brazil. Succeeding in new regions like the northeast requires a fresh approach for many companies. Consider the following:

·        Many global companies still make the mistake of doing their consumer research in São Paulo when they are designing new products or national marketing campaigns for Brazil. They don’t realize that cosmopolitan São Paulo probably has more in common culturally with New York than with any other city in Brazil.

·        Modern-format stores account for 70 percent of retailing in Brazil overall, but for only 55 percent in the northeast. To reach thousands of small (and often capital-constrained) outlets spread all over the region, packaged-goods companies must develop third-party networks specializing in frequent deliveries of goods and small drop sizes. What’s more, in Brazil as a whole, many consumer goods companies found that they had focused too much on hypermarkets when designing assortments and promotions. One company, for example, discovered that Brazil’s expanding drugstore chains were the fastest-growing channel for personal-care and beauty products. Some leading consumer goods companies have now created specialized organizations that execute distinct channel strategies in different regions and categories, with tailored product portfolios and displays.

·        Many packaged-goods companies see detergent powders as a developed category in Brazil. But relatively affluent consumers there are upgrading to larger and more sophisticated washing machines, and many consumers in the northeast are buying their first fully automated machines. New detergent formulas therefore have enormous potential—annual consumption in the northeast is less than half of what it is in the south. Seizing this opportunity requires an understanding of the regional consumer, however, particularly pack size preferences (Exhibit 4). Consumers in the northeast also want a strong perfume and great quantities of foam but care less about whitening power.

Brazil is distinct from China and India in many respects. But as these examples suggest, there too identifying growth opportunities increasingly requires a detailed understanding of vast regional variations in competition levels, income, product growth rates, consumer preferences, and retail channels.

There is no one-size-fits-all strategy for capturing consumer growth in emerging markets. What’s clear, though, is that traditional country strategies and other aggregated approaches will miss the mark because they can’t account for the variability and rapid change in these markets. As the battle for the wallet of the emerging-market consumer shifts into higher gear, companies that think about growth opportunities at a more granular level have a better chance of winning.

Tuesday, April 19, 2011

Intel and IBM highlight rebound in IT spending and increasing momentum in cloud

The computing industry has benefited this year from an unexpected rebound in business spending on information technology in the developed world and continued rapid growth in the emerging markets, according to figures released by some of the industry’s leading names late on Tuesday according to an FT article published today.

According to latest Quarterly Outsourcing trends that we are seeing, there is a resurgence of Business Process Outsourcing (BPO), 66% year over year, with activity levels near a 5 year high. Our outlook for industry upswing seems to be in line with latest earnings announcements today.
Many BPO vendors such as Accenture, Aegis, Capgemini, CGI, CSC, CSG Systems, EDB, ErgoGroup, HCL, HP, IBM, Logica, T-Systems, TCS, Xchanging and my old company Xerox ACS seem to be doing better.  We are also seeing stronger results in Manufacturing and Telecom & Media strong in 1Q11.

The earnings reports from Intel and IBM flew in the face of concerns that sagging consumer spending, flatter PC markets and disruption to supply chains from the disaster in Japan would dent a tech recovery.

A revival in business spending, in particular, has been watched as an indicator of the strength of the economic recovery. Underpinning the recovery had been an increasing concentration of IT spending in big, centralised data centres, as businesses shifted applications and services to the internet “cloud” and consumers accessed more of their information through the web, industry executives said.

“We are seeing an explosion of devices that connect to the internet,” Paul Otellini, Intel’s chief executive, told an analyst conference call. The biggest chipmaker reported “softness” in consumer markets in the US and western Europe but said it continued to benefit from the strength of demand from business customers and in emerging markets.

In a sign of the growing importance of centralized computing power, sales of IBM’s mainframe computers rose 42 per cent as it put a new generation of machines on sale.

In another sign of the deeper shift in technology markets, VMware, whose software is used to improve the efficiency of big data centres and which has emerged as one of the hottest companies in the cloud computing market, reported a 33 per cent jump in revenues in the first quarter, pushing its shares up more than 11 per cent.

Intel reported revenues of $12.8bn, up 25 per cent on a year ago and well ahead of an analyst consensus of $11.6bn compiled by Thomson Reuters, lifting its shares 5 per cent. Profits of 56 cents a share were up 30 per cent on a year ago and beat expectations of 46 cents.

IBM’s revenues rose 8 per cent to $24.6bn and its operating earnings rose 21 per cent to $2.41 a share, compared with expectations of $2.30. But its shares slipped amid concerns for signings of new contracts by its services businesses.

Big U.S. Firms Shift Hiring Abroad - Work Forces Shrink at Home, Sharpening Debate on Economic Impact of Globalization

Today's WSJ article on US-based multinationals hiring workers abroad while cutting back at home reiterates our fundamental point on how globalization will be affecting Fortune 500 firms' governance, labor supply-demand dynamics and politics behind globalization and rising unemployment in the developed markets.

Until 2050, more than half of GDP growth will come from bilateral trade and commerce among developing economies. U.S. multinational corporations therefore have no choice but to   operate as a truly global firm with local talent available where it will be most needed. Anyone who would dismiss this crucial trend as simply shifting workforce toward cheaper labor economies should visit these economies like China, Brazil, India, Turkey to better understand the local employment and wage dynamics.

U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy.

The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That's a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad.
In all, U.S. multinationals employed 21.1 million people at home in 2009 and 10.3 million elsewhere, including increasing numbers of higher-skilled foreign workers.
The trend highlights the growing importance of other economies, particularly in rapidly growing Asia, to big U.S. businesses such as General Electric Co.,Caterpillar Inc., Microsoft Corp. and Wal-Mart Stores Inc.
The data also underscore the vulnerability of the U.S. economy, particularly at a time when unemployment is high and wages aren't rising. Jobs at multinationals tend to pay above-average wages and, for decades, sustained the American middle class.
Some on the left view the job trend as reason for the U.S. government to keep companies from easily exporting work overseas and importing products back to the U.S. or to more aggressively match job-creating policies used in some foreign markets. More business-friendly analysts view the same data as the sign that the U.S. may be losing its appeal as a place for big companies to invest and hire.
"It's definitely something to worry about," says economist Matthew Slaughter, who served as an adviser to former president George W. Bush. Mr. Slaughter, now at Dartmouth College's Tuck School of Business, is among those who think the U.S. has lost some allure.
A decade ago, Mr. Slaughter, who consults for several big companies and trade associations, drew attention with his observation that "for every one job that U.S. multinationals created abroad...they created nearly two U.S. jobs in their [U.S.-based] parents." That was true in the 1990s, he says. It is no longer.
The Commerce Department's summary of its latest annual survey shows that in 2009, a recession year in which multinationals' sales and capital spending fell, the companies cut 1.2 million, or 5.3%, of their workers in the U.S. and 100,000, or 1.5%, of those abroad.
The growth of their overseas work forces is a sensitive point for U.S. companies. Many of them don't disclose how many of their workers are abroad. And some who do won't talk about it. "We will decline to comment on future hiring or head-count numbers," says Kimberly Pineda, director of corporate public relations for Oracle Corp.
Those who will talk say the trend, in some instances, reflects the rising productivity of U.S. factories and, in general, a world in which the U.S. represents a smaller piece of a bigger whole. "As a greater percentage of our sales have been outside the U.S., we have seen our work force outside the U.S. grow," says Jim Dugan, spokesman for construction-equipment maker Caterpillar, which has added jobs more rapidly abroad than in the U.S.
The Commerce Department's totals mask significant differences among the big companies. Some are shrinking employment at home and abroad while increasing productivity. Others are hiring everywhere. Still others are cutting jobs at home while adding them abroad.
At some companies, hiring to sell or make products abroad means more research or design jobs in the U.S. At others, overseas hiring simply shifts production away from the U.S. The government plans to release details about various industries and countries in November.
While hiring, firing, acquiring and divesting in recent years, GE has been reducing the overall size of its work force both domestically and internationally. Between 2005 and 2010, the industrial conglomerate cut 1,000 workers overseas and 28,000 in the U.S.
Jeffrey Immelt, GE's chief executive, says these cuts don't reflect a relentless search for the lowest wages, or at least they don't any longer. "We've globalized around markets, not cheap labor. The era of globalization around cheap labor is over," he said in a speech in Washington last month. "Today we go to Brazil, we go to China, we go to India, because that's where the customers are."
In 2000, 30% of GE's business was overseas; today, 60% is. In 2000, 46% of GE employees were overseas; today, 54% are.
Mr. Immelt says GE did or will add 16,000 U.S. jobs in manufacturing or high-tech services in 2010 and 2011, including 150 in Erie, Pa., making locomotives for China, and 400 at a smart-grid technology center in Atlanta.
Caterpillar increasingly relies on foreign markets for its sales. It has been adding workers world-wide—except for global layoffs in 2009, amid the recession—but is hiring much faster abroad. Between 2005 and 2010, its work force grew by 3,400 workers, or 7.8%, in the U.S. and 15,900, or nearly 39%, overseas.
Mr. Dugan, the company spokesman, says Caterpillar still does most of its research and development in Peoria, Ill., where it is based, and that "a little over half" of its planned $3 billion in capital spending this year is earmarked for facilities in the U.S.
Several high-tech companies have been expanding their work forces both domestically and abroad, but doing much more of their hiring outside the U.S.
Oracle, which makes business hardware and software, added twice as many workers overseas over the past five years as in the U.S. At the beginning of the 2000s, it had more workers at home than abroad; at the end of 2010, 63% of its employees were overseas. The company says it still does 80% of its R&D in the U.S.
Similarly, Cisco Systems Inc., which makes networking gear, has been creating jobs much more rapidly abroad. Over the past five years, it has added 10,900 employees in the U.S. and 21,350 outside it. At the beginning of the decade, 26% of its work force was abroad; at the end, 46% was.
Microsoft is an exception. It cut its head count globally last year, but over the past five years, the software giant has added more jobs in the U.S. (15,300) than abroad (13,000). About 60% of Microsoft's employees are in the U.S.
While small, young companies are vital to U.S. economic growth, big multinationals remain a major force. A report by McKinsey Global Institute, the think-tank arm of the big consulting firm, estimates that multinationals account for 23% of the nation's private-sector output and 48% of its exports of goods.
These companies are more exposed to global competition than many smaller ones, but also more capable of taking advantage of globalization by shifting production, and thus can be a harbinger of things to come.
The economists who advised McKinsey on its report dubbed multinationals "canaries in the coal mine." They include Mr. Slaughter and Clinton White House veterans Laura Tyson, of the University of California, Berkeley, and Martin Baily, of the Brookings Institution.
They warn that a combination of the U.S. tax code, the declining state of U.S. infrastructure, the quality of the country's education system and barriers to the immigration of skilled workers may be making the U.S. less attractive to multinationals. "We can excoriate them" and also listen to them, Mr. Slaughter says of the multinationals. "But we can't just excoriate them."
Other observers see the trend as a failure of U.S. policies to counter aggressive foreign governments. "All the incentives in the global economy—an overvalued U.S. dollar, lower corporate taxes abroad, very aggressive investment incentives abroad, government pressure abroad versus none at home—are such as to steadily move the production of tradable goods and the provision of tradable services out of the U.S.," says Clyde Prestowitz, a former trade negotiator turned critic of U.S. trade policy. "That has been having, and will continue to have, a negative impact on U.S. employment and wages."

Monday, April 18, 2011

Join our new networking group on Linkedin - New Silk Road Business

Global trade is rapidly shifting east. Are you well-equipped to conduct business in the developing economies? Join our new business group today:http://linkd.in/gdon0o

Saturday, April 16, 2011

Top 5 lessons unlearnt from First Data in China

I was just reading about First Data's growth plans in China. A Private-Equity owned, highly successful, US based First Data with over $10 billion in sales is full of "lessons unlearnt" to corporate world about how to fail in pursuit of growth in developing economies.

Here are my top 5 lessons to offer to First Data:

1. Be a first mover: While risky, first movers into emerging markets have been handsomely rewarded by local markets. Typically, their products and services make a new category in the hearts and minds of consumers. As they may take over local state-owned companies or get-into local joint-ventures, local regulatory authorities tend to be more supportive. Start small with a local team supported by expats initially with a pre-set timeline to turn the local operations to all locals.

2. Have best local-partner: Fortune 500 firms tend to look at emerging markets through the same lenses they use in the US or Western Europe. They demand majority in local ventures, therefore limiting their chances of attracting best of breed local candidates.

3. Invest in long-standing relationships with local authorities and government:  Rather than hiring self-acclaimed influential local advisors, start a local branch with a small team. Spend time with local authorities and government officials. Make sure they understand your mandate over a series of meetings at different levels consistently giving the same message. Do remember that these are elected politicians and they would want to hear about your investment dollars and how many new jobs you will create for the country.

4. Recruit a local team, give them full P&L accountability and decision-making responsibility: Expats work only initially to establish processes, systems, business practices, policies and infrastructure of the parent. Make sure you have a succession plan in place for 3+ years. Do not try to manage from headquarters by force-fitting a matrix organization of centralized business divisions. They usually hire a local CEO as a "figure head" for local relationships only while having each global business head to manage local business directly from headquarters, eventually not being to capitalize on local team's entrepreneurial drive and experience which is usually a pre-requisite for success.

5. Be flexible with your business model and value propositions: What has made you successful at home may not be enough in these new tougher markets. Be adaptive and flexible. Listen to your local partner and customers whose price/value expectations may be fundamentally different and new.

You may want to read company's press release:

First Data exploring acquisition or JV for China growth, China CEO says

First Data, the Georgia, US-based global leader in financial payment processing, is exploring acquisition opportunities or joint ventures to foster growth in China, President and CEO of Great China Leehum M.Lee told this news service.

First Data could invest around USD 50m to USD 150m for an acquisition or JV, Lee noted, adding that it is keen to gain a majority stake in targets. It would welcome approaches from advisors who have ideal targets or partnering ideas in mind.

With revenue of USD 20m from China last year, First Data is aggressively aiming to scale up that figure to USD 100m within five years, and expects the potential tie-ups with local Chinese players could help it reach that goal, Lee noted. Similar approach has been applied to support its expansion plan in other places in Asia, Lee said and pointed to its joint venture deal last year with Indian bank ICICI Bank, in which First Data invested USD 80m for a more than 80% stake in the JV.

First Data would be especially interested in targets within pre-pay or mobile payment products, and synergies would be sought if the target or potential JV partner has a well-established local client base or complementary products fitting local banking clients’ need, Lee said.

First Data has looked at some potential targets in China, including Shanghai-based All In Pay, Lee noted. However, the deal did not proceed as First Data was keen on a majority stake while All In Pay only agreed to sell a 10% stake.

This news service reported that All In Pay was seeking strategic investments back in August 2010.

A source from All In Pay confirmed that the company had been in “informal contact” with First Data previously, but declined to comment further on previous talks.

Overseas players would need to tie-up with local payment companies as the sensitive financial system is highly regulated by the government, who tends to show preference to local players, a China-based industry source said. An example could be Total System Services, the US-based major competitor to First Data, that acquired a 34.5% stake in China UnionPay Data Co in 2005, the industry source said.

Meanwhile, the Chinese government is now in the process of issuing licenses for third-party payment companies among 17 applicants, the industry source said. First Data is likely to show interest in the licensed targets, and there is market rumors that the licensed list will be released late this month, the industry source noted.

Owned by buy-out firm Kohlberg Kravis Roberts (KKR), First Data reported USD 10.3bn in revenue in 2010.