Emerging markets are providing world-leading firms
These are interesting times in world business. In the early part of this year, the international corporate community was gripped by the audacious bid by Mittal Steel, the world’s biggest steelmaker by volume, for Arcelor, the second-biggest producer.
Arcelor’s strongholds are in Europe; Mittal’s are in emerging markets and in America. So the two companies were complementary in geography and in product variety. You would have thought that the opportunity to create a true global giant in steel-making would be a no-brainer for Arcelor’s shareholders.
Not so. Arcelor’s boss, Guy Dolle, immediately dismissed Mittal’s “monkey money”: Mittal’s boss, Lakshmi Mittal, is Indian born, you see. Further, even though Mittal has its headquarters in London and is registered in Holland, Mr Dolle claimed it would somehow not share Arcelor’s “cultural values”.
Fortunately for Arcelor’s shareholders, economic logic overcame racist sentiment. Not before a spirited attempt by Mr. Dolle to mount a defence, though: he raised the firm’s dividend, and authorised plans to make special payments to shareholders, apparently ready to plunge the company into debt. He brought in Severstal, a somewhat dubious Russian firm that had not even launched a bid, to become a preferred merger partner. As The Economist pointed out, Arcelor’s managers were attempting to place their own interests above those of shareholders. So much for those superior values.
It didn’t work, of course. Mittal was relentless in its pursuit, and increased its original offer to Arcelor shareholders by nearly 50%. In June the Arcelor board was forced to admit defeat, and announced the merger with Mittal as “a marriage of reason”. The venomous Mr. Dolle was consigned to history’s dustbin.
This is not the first time an Indian company has successfully stalked a global target. In 2000, Tata Group, an Indian conglomerate, paid $435 million to buy Tetley Tea, a British business with a global brand. The firm was buying its way downstream, from plantations to consumer markets. Last year, Britain’s third-largest tea brand, Typhoo, was bought by another Indian company, Apeejay. Tata Tea subsequently bought Good Earth of the USA.
Once upon a time, emerging markets were mere producers of raw material; the ‘added-value’ in terms of advanced processing, marketing, distribution and brand-building was all done by their western masters. No more. The once-subservient primary producers are on a global expansion spree, placing brands and companies in their shopping baskets.
And some very famous names are being bought. IBM, the company that produced the first personal computer back in 1981, sold its PC division to Lenovo, a Chinese firm, in 2004. China’s TCL bought France’s Thomson TV business, and Haier, a giant ‘white-goods’ producer, is on the prowl for big buys.
Is Africa in this game? Certainly. In Kenya, we can see it everywhere. Do the names DSTv, Old Mutual, Woolworths ring some bells? Of course they do. These may be South African businesses, but we are their happy consumers up here. South African multinationals are beginning to straddle the world: Anglo-American and De Beers in mining; SABMiller in brewing; Sappi in paper; and DiData in computer services. Sasol, an energy company, operates in 20 countries. MTN is an African telecommunications leader.
So influential are emerging-market businesses these days that China, India, Brazil, Mexico and South Africa were invited to this year’s G8 Summit. There would not have been much to talk about without them. Is this surprising? No, it’s just the irresistible force of the market at play.
Last year two scholars, Tarun Khanna and Krishna Palepu, characterised these companies as “emerging giants”: world-class companies in emerging markets. They are everywhere: Korea’s Samsung and LG; Mexico’s Cemex; India’s Infosys; Brazil’s Petrobras, in addition to the ones already mentioned. These crusading companies are successfully combining a vibrant entrepreneurial spirit with their intimate knowledge of emerging-market consumers to create seemingly unstoppable business juggernauts. They are making the most of the opportunities thrown up by globalisation – access to capital, to know-how, to new markets – to create fresh business models, all with a distinctive ‘third-world’ flavour.
Here in Kenya, we are not exactly sitting on our hands. There are ‘homegrown’ companies making their forays into the global business arena. The owner of this newspaper, the Nation Media Group, is a genuine multi-media, multi-market firm. Companies like Bidco and the Comcraft group already have a presence beyond our borders; emerging businesses like East African Cables and Equity Bank have the potential to become serious regional players. Not one of these companies has a foreign multinational behind it. They are products of our own soil.
But we must be careful. If Kenyan-born companies are to take their place in the pantheon of emerging giants, there are two critical hurdles to overcome: one related to competitive advantage; the other to corporate governance.
Let’s look at the sources of our firms’ competitive advantage first. For too long, competitive advantage in Kenya has meant access to patronage: having a network of political worthies who are able to do ‘favours’: ease the path to licenses; remove the grip of red tape; confer monopoly status; offer lucrative government contracts. For too many Kenyan firms, making it in business is about whom you know, not what you do.
Equally, most of our companies are family businesses, and that is their making as well as their undoing. Control of the enterprise is kept in the grip of a small family group; succession is limited to blood heirs; thinking and decision-making becomes insular and opaque. The vision and drive of the founder launches the business; but all too often, its ‘closed-shop’ nature puts a ceiling on its growth.
Lakshmi Mittal had to learn this lesson: he had to move away from his family-focused corporate-governance structures – conferring board seats and unusual voting rights to family members – in creating the merged Mittal-Arcelor firm. We will have to learn that lesson here: an emerging giant requires diverse shareholding, transparent dealings and an openness to change.
If we want to create our own emerging giants, we must invest widely in our knowledge and our people. Management teams must be defined by ability and expertise, not ethnicity and bloodline. Competitive advantage must come from superior ways of working, not from backhanders and sly entanglements with power brokers. Those backward ways may yield some transient advantage locally; internationally, they are like millstones around the country’s neck.
To take our place in world business, we must embrace new types of capital and expertise. We must allow unprecedented scrutiny of our internal affairs. We must develop advantage based on our uniqueness, not on our ability to copy. We must learn to let go in order to grow. These are recipes that may prove unpalatable to most of our business leaders. But the few who understand them and use them will make this country proud.