Transcript: Emerging Economy Meets Emerging Markets: Time to Grow?
Host: Welcome to another edition of Deloitte Insights, a production of Deloitte LLP. Deloitte Insights is an audio news podcast that looks at important business issues. Today’s program will address how the U.S. financial crisis and changing economy may impact a company’s decision to invest in emerging markets.
As we anticipate an economic upturn, transactions in emerging markets will likely be top of mind for investors again. How has the U.S. financial crisis impacted emerging market investments? With less money to spend, are companies better off using it domestically or abroad.
Companies considering opportunities in emerging markets need to be aware of some unique risks. Not only do companies need to understand who they are doing business with but also need to be aware of the U.S. laws and disclosure requirements that can add additional costs to a deal.
Joining me today to discuss some of these issues are David Williams and Tom Sager. David is the CEO of Deloitte Financial Advisory Services LLP and Tom is senior vice president and general counsel of DuPont Legal. Welcome to the program.
Tom Sager: Thank you.
David Williams: Happy to be here.
Host: We have all seen our market slowdown and M&A activity, both domestically and in emerging markets. Are emerging markets just as attractive today as they were before the downturn and do you expect that the anticipated economic upturn will result in companies being as interested in emerging market opportunities as they were in the past. Tom, let’s start with you.
SAGER: We certainly do, all of the macro leading indicators forecast strong growth in all of the developing markets for DuPont China, India, and Brazil, all showed strong performance in 2009 and will carry forward in to 2010. The China recovery started in early 2009 with back to back all time record months and orders are strong in January. In India, strong performance in 2009 exceeding 500 million in projects and we project nearly 20% of growth in 2010, and finally in Latin America projects double digit growth with Brazil as the key driver and of course Venezuela as the key uncertainty. All this translates into our corporate directors for 2010 with increased emphasis upon our emerging markets.
WILLIAMS: I would agree with Tom on a macro basis and not speaking specifically about DuPont, but just speaking generally. Tom points out the three things that I think really mattered here and why I think I would expect emerging market activity to pick up. First, these sets of emerging markets are where most people’s clients are. It’s where the business truly is given what’s happening in those economies versus what’s happening in some of the more developed economies, and Tom has mentioned before that I think are the most important. Second, because of the way that the anticipated economic upturn is going to be driven significantly by U.S. exports, we would also expect those markets to play a key role in terms of flow of funds. So my expectation is that there will be a great deal of interest from companies in terms of emerging markets deals and in fact we are seeing them now.
Host: There seems to be heightened attention on Foreign Corrupt Practices Act or FCPA compliance. For example, in August 2009, the SEC announced the establishment of five Specialty Enforcement Units, one which focuses on the FCPA. With the increase in FCPA enforcement, as well as a stricter focus on transparency what due diligence measures would you recommend companies take.
WILLIAMS: I think this is an extremely important area of concern for companies and especially for general counsel. We have the confluence of folks wanting to do more deals and more transactions in emerging markets and an enforcement organization that says it is going to focus on making sure that the rules are followed in those markets. It’s almost the perfect storm as far as we’re concerned. I think the first thing and probably the most important thing that a company can do is make sure that it has strong controls and procedures around FCPA and make sure that those are functioning. The second thing that they can do is make sure that in each market that they work in from a due diligence perspective for each deal that they consider that they understand who their counterparty is, that they have a pretty good understanding of who they are doing business with, how they are doing business with this organization, and what sort of practices this organization is known for in the markets in which they serve. That is the only way I think you can get to a reasonable measurement of what sort of risk you have associated with FCPA.
SAGER: Well stated David. I am finding one of the most increasingly important roles for the GC of a very U.S. centric company like DuPont is the need to develop a sensitivity with respect to the risk climate of these emerging markets and the best way to resource them. Our profile looks something like this. Only 35% of our revenue is derived from the U.S. today. By 2012, our sales to non-U.S. emerging markets will exceed sales in the U.S. yet we only have 60 out of a 190 lawyers reside outside the United States. So, with our thrust and focus upon the emerging markets and an increasing decentralization upon our businesses with a more regional focus we have got to develop a risk profile and couple that with the emphasis on faster decision making and speed and the need to, as David so aptly put, understand the lay of the land and the third parties that we will be doing business with. It calls for a heightened sensitivity and attention of our people on the ground to ensure that our culture and our risk profile is properly managed and overseen.
Host: When you consider the declining value of the U.S. dollar, the scarcity of credit, and the additional legal costs involved, are there still good deals to be had in the emerging markets and if so, which geographies or industries would you expect to see an uptick in business activity in 2010. David what are your thoughts?
WILLIAMS: I believe that absolutely there are a great deal of opportunities to good deals at emerging markets. Again, I think that is going to drive a fair amount of the M&A activity that we see and in fact has been driving a fair number of the transactions that we have been seeing. I think the markets are the ones that Tom mentioned earlier. Essentially, the so-called BRIC countries, Brazil, the former Soviet Bloc, India, and China. I think each of them represent markets where there is a significant growth, largely markets that have done well given the recent economic issues that we have had in the United States, those countries for the most part have not experienced those sorts of things and I think ultimately those are the countries that present the largest opportunities. Although, there would be opportunities in quite a few. I would also point out that at least in the United States there are some industries where we would expect an early expansion vis-à-vis the recovery. So, for example in Oil and Gas, or in Aerospace and Defense, or in Technology and Telecom, or in some of the financial services industries that aren’t particularly and significantly impacted by the specter of new regulation. We would expect all of those to be early advantaged with regard to due transactions and again given the market factors that those companies face, I would expect them to be looking at emerging market deals.
SAGER: Well stated! From our perspective, we have defined our strategies going forward to be aligned with what we consider to be the megatrends feeding the world, developing alternative sources of energy, and personal security, and all three megatrends countries like China, India, certainly Brazil, and Russia will play a prominent role. The fact that the dollar may be devalued won’t deter us from our interest in developing along with locals on the ground partners, potential partners, areas such as solar fuels or solar panels, or photovoltaic’s business is one that we are actively looking for joint venture partners and that will be true for all of our businesses that are focused on the megatrends and again feeding the world developing alternative sources of energy and of course personal protection.
Host: Any final thoughts you would like to share.
SAGER: The complexity, the regionalization, the need for talent on the ground to help you assess the risks associated with each of these countries and regions is foremost on our mind and of course David mentioned the long arm of Foreign Corrupt Practices. What probably didn’t come out is that these countries have their own sets of rules and regulations that we have also got to be sensitive to.
Host: Thank you for joining us today.
SAGER: Thank you , David.
WILLIAMS: Thank you, Tom. It was a pleasure to me as usual.
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