Understanding Emerging Markets: Building Business BRIC by Brick

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Stefano Pelle

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    Dedication

    To my mother, who has experienced with me the extraordinary changes in the Indian subcontinent at the outset of the 21st century.

    Acknowledgements

    This book was written, thanks to the experience acquired during several years of work in Asia and Russia. Therefore, my first thanks goes to the company where I have been working since 1998, Perfetti Van Melle, that gave me the opportunity of living in these countries for about eight years, thus getting exposed to very different ways and styles of work, as well as to a large cross section of human behaviour.

    More specifically, I would like to thank my colleagues in India, who have largely contributed to the book: first of all Chinoo Sethi, who helped me extensively in giving a readable shape to my thoughts; Abha Kohli, who first read the draft and gave some useful suggestions for better editing; Himani Joshi, who helped in collecting some of the materials; Arun Kumar and Sameer Suneja, who gave some valuable inputs for important parts of the central chapters; Harsh Arora and his team, who as always helped with the legal aspects; my colleagues Huub Sanders in China and Marco Tonolo in Brazil, who provided some interesting examples of their living and working in those countries; my colleague Ramesh Jayaraman in Bangladesh, for providing interesting material for the last chapter as well as for having helped in finding a suitable title; my friend Massimo Baggi in Moscow, who did the same for Russia. A due thanks also goes to Abhimanyu Ghosh and Aiana Dhillon from Planman Media India, who created the link with Sage India, and within Sage, to Leela Kirloskar, who made the link work.

    A word of thanks also to my friend Chiara Letizia and my brother Giampiero, who gave suggestions and encouragement and last but not the least, to my wife Shama, who could bear with me during the weekends spent writing instead of relaxing with her.

    I also thank Palgrave Macmillan for granting permission to reproduce three graphs (Different Profiles of Expatriates, Government Influence in Business as Perceived by Western Managers, Class Structures in Development Stages) from the book Strategies for Asia Pacific by P. Lasserre, H. Schutte (McMillan Press, 1995, London); The Boston Consulting Group for allowing us to copy and reprint the table, The RDE 100 Span Multiple Industries and Countries from the report, The New Global Challengers: How 100 Top Companies from Rapidly Developing Economies Are Changing the World by Marcos Aguiar et al. (May 25, 2006); Sage Publications for granting us permission to reprint the graph, Entry and Negotiation Strategies from the book, Doing Business in Emerging Markets by S.T. Cavusgil et al. (Sage Publications, 2002).

    The proceeds from the royalty of this book will go towards organizations taking care of underprivileged Indian children. Those interested in making a contribution may contact the author at fenestellapo@yahoo.com

    Introduction

    The inferiors revolt to become equals and the equals to become superiors. This is the frame of mind that generates revolutions —Aristotle

    Since the beginning of the new millennium, the spectacular growth of some emerging countries has been noticed more and more by the media and the opinion leaders. Western countries seem to have finally realized that places like India and China are not only exotic locations to spend holiday time; they are also extremely promising investment destinations and growing economies with the potential of becoming the engines of world growth for the years to come.

    The opportunity of building on the growth of some of the most potential economies has given the inspiration for the word BRIC, coined by Goldman Sachs in 2003 (Goldman Sachs 2003). This acronym puts together four of the countries which have shown, during the last few years, a particularly promising development potential, namely, Brazil, Russia, India and China.

    In the following pages, the main statistics of these countries will be compared to those of the current largest world economies and projected onto the next decades to understand what could look like the global economic scenario at that time and the possible implications of this.

    The market opportunities existing in the BRIC countries leave little choice to companies operating in the developed world and in need of growth to sustain their profitability but to conquer a significant share of them. An early entry in these countries will secure a competitive advantage which could prove crucial to benefit the growth of their emerging middle classes.

    Some of the most common mistakes and important decisions to make when entering these markets are analysed in the course of the book. A detailed study of the working environment will touch upon some important issues concerning the internal resources, their utilization and some of the cultural sensitivities proper to the Emerging Countries (E.Cs). The main external forces impacting the business and some of the ways to successfully interact with them will also be dealt with. Two possible approaches to starting a business in E.Cs will be analysed and their main advantages and disadvantages compared. The key choices concerning the business model and the marketing mix variables will be briefly reviewed, and some of the important managerial and ethical issues to be considered in order to achieve a sustainable development will be mentioned towards the end of the book.

    The last chapter will give an overall glance at the consequences of the fast growth of the BRIC countries on the international competitive scenario and at the global geopolitical equilibrium. The emerging Multinational Corporations sprouting from their country of origin are on the verge of becoming global companies, thus taking market share from the established international players. On a different perspective, the buoyancy of the economies of the E.Cs drastically alters the world geopolitical situation, by increasing the weight of the rising nations that become a stronger counterpart to the current dominance of the USA.

    The book is the result of many years of operation in several E.Cs: it focuses therefore, on day-to-day facts and situations rather than on a theoretical perspective, trying to provide useful insights to smoothly overcome hurdles and difficulties to those who have decided to start a business or have already a presence to be developed in one of these countries. However, there are at times recalls and references to Business and Marketing Theories and Manuals, which could be of use to the reader who would like to go more in depth in the specific topic.

    Many of the examples quoted will be pertaining to the fast-moving consumer goods (FMCG) industries: therefore, the learning shared will be more applicable to those readers operating in their universe. However, the general parts will provide useful insights also for players of industries out of the FMCG, who have decided to catch some of the business opportunities offered in any of the potential E.Cs.

  • Appendices

    Appendix 1

    Financial Times: New Delhi, Friday, 17 March 2006

    EU Curbs on Shoe Imports Attract Only Three Votes

    Only three of the 25 European Union member states yesterday voted in favour of a proposal to sanction cheap leather shoes made in China and Vietnam, highlighting a growing split in Europe about how to respond to booming Asian exports.

    The outcome of the confidential vote in the EU's antidumping committee shows the difficulties facing Peter Mandelson, the EU's trade commissioner, as he tries to construct a trade policy that meets conflicting European demands and can withstand a possible challenge before the World Trade Organisation.

    The proposal received the cold shoulder from an accidental coalition of countries seeking tougher curbs on imports to protect domestic producers, and others that oppose sanctions as unduly protectionist.

    The three countries that voted in favour of the shoe curbs were the smaller member states Belgium, Slovakia and Malta. Nine countries voted against, including Sweden and the other Nordic countries, and Ireland and Slovenia, diplomats said.

    Eleven countries abstained, led by Italy and other nations that are home to most of the traditional European shoemakers seeking EU sanctions against unfair competition from Asian rivals. Their refusal to support Mr Mandelson at this stage underlines unhappiness about his proposed exemptions made for sports and children's shoes, which they fear could give Asian producers a loophole to rebrand exports. Germany and Cyprus did not vote.

    Thomas Östros, the Swedish trade minister, yesterday told the FT that Mr Mandelson should withdraw his proposal now, given the ‘very unusual [voting] result’.

    ‘The Commission should really reconsider its whole policy at this stage and how they work with anti-dumping measures. We need to strengthen the quality of anti-dumping investigations in order to regain the confidence of member states’, he said.

    Unice Criticises EU

    Europe's main business federation, Unice, has attacked the European Commission for taking too defensive a position on agriculture in the Doha global trade talks, which it says is pulling down the level of ambition in liberalizing industrial goods, writes Frances Williams in Geneva.

    Adrian van den Hoven, Unice's international relations director, said Unice had written a ‘strong letter’ to Peter Mandelson, European Union trade commissioner, criticising the EU stance at the World Trade Organisation ministerial meeting in Hong Kong in December.

    ‘The agriculture negotiations hang over the heads of European business all the time’, he said yesterday. ‘Low ambition is simply not going to work for us.’

    Mr Mandelson's office put a positive spin on the vote. It argued that it showed his plan represented the middle ground in a growing clash between more protectionist countries that demand tougher curbs, such as Italy and Spain, and liberal nations that have little or no shoe production and want European consumers to benefit fully from cheaper goods made in Asia.

    The ‘protectionist’ camp also wanted Mr Mandelson to impose full sanctions at once so they would affect-pricing before the next season's collection. Instead, he will introduce the sanctions in early April and gradually raise the duties to 19.4 per cent for China and 16.8 per cent for Vietnam.

    Since the vote was only consultative, Mr Mandelson is proceeding with his plans and is expected to get formal backing from the EU executive on Wednesday. Mr Mandelson's office said he would then use the coming months to ‘establish a consensus among member states on a definitive course of action’, namely whether to prolong the sanctions by five years after October.

    China has responded angrily to the proposed sanctions and warned that it could take the shoe issue before the WTO to expose ‘serious flaws’ in the data and arguments presented by Mr Mandelson to justify anti-dumping duties.

    Raphael Minder in Brussels
    Appendix 2

    The Times of India: New Delhi, Tuesday, 29 August 2006

    Gyanendra, Kin Hold Major Shares in 17 Firms: Probe

    ‘He Forced Govt. to Pay Millions to Royal Aunt for Murky Deals’

    Kathmandu: Despite strenuous denials by at least two leading Indian joint ventures in Nepal—including tobacco giant ITC—a probe committee has informed the Nepal government that Gyanendra and his kin hold major shares in 17 companies.

    Among the 17 companies whose yearly revenue is estimated to run into billions of rupees are Surya Nepal, ITC's venture in Nepal with British American Tobacco and a Nepali partner Hotel Soaltee Crowne Plaza, in which India's Oberoi Group has a 6% stake.

    Also in the list is Himalayan Goodricke Private Ltd, a JV with India's Goodricke company and National Biscuit and Confectionery (P) Ltd, Nepal's first biscuit company in which India's Britannia Industries began technical collaboration from 1980.

    The other 17 companies include a controversial five-star hotel, Hotel de l'Annapurna, in which the Taj Group of India held a stake but sought to divest it after pulling out of a management contract about two years ago, and a power company, in which the American investment company was forced to sell its shares to its Nepali partners after non payment of dues by the state-owned Nepal Electricity Authority.

    Though Surya Nepal and Soaltee Crowne Plaza, which in the past were of 10 shut down by Maoists due to the royal link, always denied the connection, a parliamentary committee formed to detail the royal family's assets to bring them under the tax net, had the link corroborated on Sunday after the industry, commerce and supplies ministry sent in its report.

    According to the preliminary report, though the majority shares in the companies were in the name of Gyanendra and his kin, a large percentage was transferred to his daughter Prerana and others during the 15-month direct rule of the monarch, apparently to hide the identity of the real owners.

    A former royalist minister, his wife and the son of a former general and aide de camp were among such beneficiaries.

    The culture of reciprocity and anonymity in business dealings flourished during Gyanendra's control, with the monarch compelling the government to pay millions to a royal aunt, Helen, ostensibly for medical treatment. But as the emerging facts show now, probably for her complicity in his murky business deals.

    IANS
    Appendix 3

    The Bangladesh Observer: Dhaka, Monday, 3 April 2006

    Why Industries Fail to Spread Roots

    A top investor in the country's tourism sector is leaving the country out of frustration. So aghast is he with the administrative corruption, interference, harassment and bureaucratic tangle that he has at last decided to give up his effort to develop the country's tourism industry at international level. Before leaving for the USA, he gave vent to his feeling of utter disappointment with the bureaucratic system at a press conference. The entrepreneur with vast experience behind him has spoken not only of the awful condition he had to undergo but also made a case for others like him. His considerate opinion is that it is impossible for industries to flourish here under this condition.

    As the owner of the only five-star hotel in Cox's Bazar and as a widely touring man, he possibly could do what he intended for tourism here. But what is significant is that he has painted a grim picture of the country's industrial sector. He pointed out the weakness in our industries and how that weakness becomes endemic. Entrepreneurs or industrialists cannot carry on their business freely even though they have to accept bank loans at high interests. At every step they have to satisfy different authorities and thus their industries become sick. Many of them turn loan defaulters and bankrupt. Indeed, there are more administrative manipulation than our naked eyes can meet.

    Masum Iqbal, owner of the five-star Sea Gull at Cox's Bazar, has said so many things in his press conference: What he did not mention is the corrupt business cartel or syndicate that has developed over the years with blessings from the top political leadership. No wonder, the industrial base of the country has not shaped in any desirable manner; mostly the service sector without appreciable back-up linkage has spread its roots. All because a privileged section loyal to political coteries and having mutual stakes has tried to monopolise the economy of the country. These people have grown filthy rich and they have slammed the door in the face of any enterprising and honest person looking for an entry into business. Business has been too unclean here to draw really honest people.

    Indeed, the corrupt influences of politics are now felt in every area of Bangladesh, but nonetheless it is not as strong in other areas as in the economic sector. After all, money has the power to make and unmake an individual, a society or even the country. Political corruption has taken a huge toll of the economy and economic corruption has taken in its turn an incalculable toll of Bangladesh society. The two are inseparable now.

    The owner of the Sea Gull has done a good work by drawing the nation's attention to the problem facing the country in the industrial sector. Now it remains to be seen how the nation reacts to the matter. The fact that he wanted to put Cox's Bazar on the global tourism map in a more interesting way was not at all important to the people in power. They were interested to reap benefit from the initiative. Anyone with expertise and resources, he asserts, is highly appreciated in the USA but in Bangladesh all he received is cold shoulders from the government side. This is sad. Rhetoric that the government is ready to warmly welcome investors is one thing and the reality is completely different. Let the power wielders realise what a loss it would be to compel him to go. In the interest of the country, it is necessary to encourage investment in the private sector.

    International Herald Tribune: Friday, 14 July 2006
    Art of the Deal: It's Different in China
    Cautious Approach Source of Frustration

    China Mobile Communications' planned purchase of Millicom International Cellular was such a sure thing that invitations had already been issued for a party in China to celebrate it.

    Then, just hours before Millicom executives and advisers were to board planes to fly to Beijing to announce the $5.3 billion deal on July 3, the bad news started trickling in.

    But it was not coming from China Mobile's bankers, or its top executives, with whom Millicom's team had been negotiating or months. Instead, the first sign that something was wrong came from news reports out of China, according to people close to Millicom, which is based in Luxembourg and has interests in cellular systems primarily in emerging markets. Millicom issued a statement later that afternoon that it had terminated ‘all discussions concerning a potential sale’, and its stock plunged more than 25 percent.

    The demise of the closely watched deal, which would have been the largest overseas transaction for a Chinese state-owned company, is exposing a chasm between deal-making style in China and that of Europe and the United States. In China, many see China Mobile's last-minute exit as smart corporate strategy: Many analysts and deal makers say China Mobile narrowly avoided overpaying for a disparate group of assets.

    In European and American deal-making circles, though, the way the exit was handled is prompting much frustration at investment banks and boardrooms. Had China Mobile warned Millicom earlier, it might have avoided upsetting the stock market, analysts say.

    Some financial advisers warn that Chinese companies could find their buying prospects drying up. ‘For a lot of prospective targets, they have lost credibility’, said one European banker who spoke on the condition of anonymity because he did not want to alienate any prospective Chinese clients.

    The debate comes at a time when Chinese companies' overseas strategy is being closely watched. Corporate China's outward expansion is pegged to a strategy of mergers and acquisitions, particularly of brand-name Western companies, but so far, transformational overseas deals have been scarce.

    Wall Street's biggest investment banks paid multimillion-dollar salaries to hire Chinese bankers with top connections in recent years. While deal volume and equity offerings within the country have been brisk, big deals outside of China have been scarce, particularly outside of the energy sector.

    Acquisitions by Chinese companies (not including Hong Kong-based companies) outside the country fell from $7.2 billion in 2004 to $4.9 billion in 2005, according to Thomson Financial. That is much smaller than the amount of external deals completed by companies in countries a tiny fraction of China's size. In 2005, Belgium-based companies bought $8.65 billion worth of companies outside the country, for example.

    This year, Chinese companies are on track for record overseas deal-making, with over $9.8 billion in purchases completed already. Still, some bankers warn against the expecting a flood of big name overseas acquisitions. Chinese companies and managers are still getting used to deal-making, they say, and are by nature wary when it comes to large transactions. Some say the Millicom-China Mobile example may be the norm, rather than the exception.

    Liang Meng, J.P. Morgan's co-head of China investment banking, expects just a few major deals out of China each year. The reason, he said, is largely because Chinese managers tended to proceed more slowly than many of their counterparts in the West before agreeing to go ahead with a transaction.

    ‘They are more cautious, either because they have not done much of it or because they are entering into totally new markets or totally new environment’, Meng said.

    These executives have usually been in their job for 20 years or 30 years, much of that time solely inside China, and ‘are becoming more international’, he said.

    ‘They have usually moved up because they are right most of the time or all of the time’, Meng said, and they want to be absolutely certain a deal is the right move.

    It should not be a surprise that despite Wall Street's heavy spending to hire bankers, merger volume has been subdued, according to some analysts.

    ‘We are talking about a culture of doing business that has been learned over many centuries’, said Jay Berry, a professor of business studies in China at Jilin University-Lambton College and a former McKinsey consultant.

    Chinese companies are ‘absolutely’ slower than their foreign counterparts to do deals, Berry said. ‘They are much absorbed by internal problems, tied to the wrong products, fragmented, unprofitable, uncompetitive, highly political and drowning in debt’, he said.

    The months of negotiations between China Mobile and Millicom were complicated and often frustrating for the European advisers and executives, who say their Chinese counterparts were difficult to pin down for meetings and that establishing a schedule to get the deal done was impossible. ‘If they agreed to a date, they seemed to see that as a concession’, one adviser said.

    Veteran China deal makers found their European colleagues discomfort amusing and say they encountered a common negotiating tactic.

    ‘When Kissinger and Nixon went to China, they didn't know when they were going to meet Mao’, said jack Huang, head of the greater China practice at the law firm Jones Day. ‘That game has been played by the Chinese over and over.’

    Still, Huang cautioned against saying that Chinese executives would not be able to close deals overseas.

    ‘The Chinese know very well if you want to do deals on the international arena, you have to move expeditiously’, he said. ‘This is not a situation where the bureaucrats don't know the realities outside of China.’

    Still, Chinese companies are operating at a disadvantage to their multinational competitors on the deal-front. Multinational companies outside China generally have a special team that deals with mergers and acquisitions, said Oded Shenkar, author of ‘The Chinese Century’ and a professor of management at Ohio State University.

    ‘They have experience and routines as to how you look at a deal, and they'd abort it fairly early on’ if it was not going to work, he said. ‘The Chinese do not have that yet’, Shenkar said.

    In the past year, China's successful big-ticket deals were in the energy sector, including the $4.5 billion purchase PetroKazakhstan by China National Petroleum, the parent of PetroChina, and the $1.42 billion purchase of Ecuadorean oil fields by Andes Petroleum.

    Top executives in the sector are used to deal-making, some advisers. Andes management is a ‘sophisticated team’, said Angus Barker, UBS's head of mergers and acquisitions for Asia. UBS advised Andes on the Ecuadorean deal. Judging from the energy transactions, Chinese companies have ‘shown they can mix it with all comers from around the world in auctions and win’, Barker said.

    Heather Timmons and Donald Greenlees
    The Moscow Times: Thursday, 16 March 2006
    Russia as a Prime Investment Destination
    Business Experts' Opinion: Which Challenges Do Companies Face in Russia?

    Russian businessmen often blame high political risks, which ‘scare away’ their foreign partners, but companies themselves don't focus attention on proper corporate governance, ‘transparent’ shareholder structure and putting accounting into the requirements of IAS. Taking into account global investment funds standards being common for all the countries, a company needs to demonstrate its striving to ‘speak a common language’ with the funds—the language of figures and ratings supported by ‘Big 4’ audit companies and key international rating agencies.

    Pavel Neumyvakin, CEO, ‘Uniastrum Bank’

    Russia amazingly combines features of an emerging market having a low awareness of IP matters and a high piracy rate, with characteristics of a developed market having a developing middle class and high purchasing power for consumer electronics, PCs, and, of course, software. As a result, any software company working on the Russian market sooner or later faces a number of challenges linked to IPR and its protection.

    Piracy takes a number of forms in Russia—and software producers can suffer from some, if not all, of them. Examples include direct counterfeiting (CD production and distribution through street resellers, flea markets and on-line shops), corporate mislicensing (one license bought, but products installed and used at a number of PCs), casual copying (software exchange among friends), hard disk loading (illegal copy pre-installation on new PCs), internet piracy (unlimited hosting at internet sites free of charge or for little fee without permission from the IPR owner).

    Despite all of the above, the situation is clearly changing. IPR legislation has evolved significantly over the last several years and today protects the interests of IP owners. The government is also paying recognizable attention to the piracy problem: A governmental IPR commission was formed recently, and there is a police department focused specifically on computer and software crimes. During the last two years, the share of unlicensed PCs (with no legal software pre-installed) shipped to Russia decreased more than 20 percent. Today, more than half of all PCs coming to Russia have legal operating systems pre-installed. We expect in the coming years that the share of unlicensed PCs will keep falling. According to the research agency Information Data Corporation, piracy has continuously decreased the last 10 years and there is potential for its further decrease. Although some significant challenges exist and IPR owners must address them with the appropriate resources, the opportunities for software market players today and in the near future are significant and worth the effort.

    Sergey Alpatov, LC Manager, Microsoft Rus

    We feel that the market in Moscow is fairly well developed and that St. Petersburg is a place where opportunities have been missed in the past. By bringing together a fund of such size—which is going to be about $50–100 million—this gives us the opportunity to invest in larger projects and to work with the city government on a scale that hasn't been done in St. Petersburg in the past, especially by a Western firm.

    We've really seen a lot of positive reforms which have helped us to do business on the scale that we now hope to do. The (project in Sestroretsk) is a way to modernize existing brownfield sites which have been underutilized in the city, where you have industrial properties sitting on prime real estate. The changes in legislation have allowed us to work with the city government and some of the factories to purchase this land and redevelopment it in a way that is beneficial obviously to us and to the city.

    What are some of the misconceptions that people not doing business in Russia have? There is a desire of the city government to develop St. Petersburg. The city is actively working, and generally transparently working, to try and make this process work smoothly and to work with foreign investors. They are actively courting foreign investors and eager to make this experience as smooth and worthwhile as possible.

    Mac Broderick, Jensen Group

    The Overseas Private Investment Corporation (OPIC) has been helping U.S. businesses invest in Russia since 1992—approving more than 140 finance and political risk insurance projects, worth more than $4.5 billion, in the last 13 years. Currently we have approximately $475 million invested in Russia, and each year since 2001 we have seen an increase in the number of approved projects. For instance, in 2004 we approved seven projects for Russia and in 2005 we approved 14 projects.

    Given that our core mission is to foster economic development in emerging markets, the most interesting development regarding Russia as a destination for U.S. direct investment is that we see increasing interest in relatively underserved regions. Last year we supported projects in Novosibirsk, Samara, Yekaterinburg and Vladivostok, and we anticipate that this trend will continue. We were also interested to see that all of our projects last year were outside of natural resource sectors and were primarily sponsored by small- and medium-sized American enterprises and investors.

    Because OPIC works to support U.S. investment—I think it is fair to say that our growing and diversifying portfolio of projects here is an indicator that Russia is increasingly popular as a destination for American direct investment. This is also true when we compare Russia to other countries. In 2005, OPIC approved more projects in Russia than in any other country in which it works.

    The Advertising Supplement did not involve the reporting or editorial departments of The Moscow Times.

    Michele R. Smith, Investment Services Manager, Russia & CIS, Overseas Private Investment Corporation (OPIC)
    Appendix 4

    The Times of India: Mumbai Edition, Sunday, 9 April 2006

    Chinese Piggyback on Hamara Bajaj Again

    New Delhi: Imitation, they say, is the best form of flattery. But for India's largest two- and three-wheeler maker Bajaj Auto, it's more of a wake-up call—to stand up and protect a brand that's been a household name in India for decades.

    Last week, the brass at Pune-based Bajaj Auto was jolted by a new threat—a lesser known Chinese rival which was making and marketing CNG three-wheelers in dragon land under the brand name ‘Bajaj’.

    This is not the first time that Bajaj Auto has faced a copycat problem from China. A few months back, the firm had come across another Chinese manufacturer, which had built a carbon copy of its top-seller bike, Pulsar, and was marketing it in Latin America under the brand name Gulsar.

    ‘It was a rude shock for us. The company was actually making CNG three-wheelers and marketing them as China-made Bajaj autorickshaws’, says a company source.

    The Chinese copy—built by Gaongqing Union Auto Co—has nearly the same dimensions as the Indian original. But the Chinese have gone a step forward and are offering the product in custom-built options as well.

    Although Bajaj Auto MD Rajeev Bajaj says efforts are on to track the copycat and raise intellectual property rights issues with the firm, industry insiders say it's easier said than done. ‘It's a country that thrives on copycats. Even global brands like GM and Yamaha have not been able to stop sales of copies of their vehicles. It won't be easy for Bajaj either’, says an analyst.

    Byas Anand/TNN
    The Moscow Times: Tuesday, 21 March 2006
    Chinese to Make Their Own Volvos
    Volvo Hopes the Move will Help to Make up for its Late Entry into the Market

    BEIJING—Ford's Volvo said Monday that it would begin making cars in China this year, a step into the world's third-largest car market that other up-market automakers took years ago.

    Chief executive Fredrik Arp said Volvo would build its S40 sedan at a plant owned by Changan Ford, a Ford joint venture in the southwestern city of Chongqing.

    While Volvo conceded it was late in entering a increasingly difficult market where profit margins were shrinking, the company was confident Chinese manufacturing operations would be profitable as early as next year.

    Volvo said it could reach its Chinese manufacturing target of 10,000 cars per year in 2007, and was working with a number of Changan Ford's local suppliers to meet the government's local content requirements and the company's quality standards.

    ‘We are, after working with [Changan Ford] on this project for over a year, convinced that their factory, working together with our own experts, can produce the quality Volvo requires’, Arp told reporters.

    ‘At 10,000 units, we will be making money’, said Alexander Klose, head of Volvo's Asia Pacific operations.

    Changan Ford is a joint venture between the second-largest U.S. carmaker and Changan Automobile.

    Even with the recent strong growth in China sales, Volvo still lags behind its global rivals, such as Volkswagen's Audi, which has been making expensive cars for years for an increasingly cash-rich and style-conscious Chinese middle class.

    Volvo's unit sales in China almost doubled in 2005 to over 4,800 units, and could more than double this year to 10,000. The company also sees significant growth for the foreseeable future.

    ‘There is as good possibility it could double again next year’, Klose said.

    BMW set up its China factory in 2003, and Daimler Chrysler is building a plant in Beijing that will be able to build 25,000 Mercedes-Benz cars annually.

    Chinese car sales grew 15 percent in 2004, after almost doubling in 2003, and analysts expect growth of 10 percent to 15 percent this year.

    Even as overall growth slows, global manufacturers are confident China's dynamic economy will continue to produce more customers for higher-end cars.

    ‘China will probably be the most important car market within five to 10 years in the world’, Arp said. ‘To be an importer only is not a long-term strategy.’

    Rising competition is also eating into profits, turning a once lucrative market into one where high volume replaces high profits.

    ‘The profit margins in this market are not outstanding in any direction’, Klose said. ‘China is becoming a regular market.’

    After reviewing the China manufacturing operations at the end of next year, Volvo will reassess the market and determine if expanding output—which could include other models besides the S40—is justified.

    ‘We will manufacture this car. We'll see how it works. We'll see how we are doing next year’, Klose said.

    Kirby Chien, Reuters
    The Times of India: New Delhi, Wednesday, 26 July 2006
    Tata, Fiat to Form JV for Cars
    New Firm to Roll Out Grande Punto; Also Plans to Explore Venture in Argentina

    Mumbai/New Delhi: The Tata-Fiat alliance is moving into second gear. The automobile majors have agreed to form a JV to manufacture passenger cars, diesel engines and transmissions for the Indian and overseas markets. The firms have also agreed to explore possibilities of a similar partnership in Argentina.

    The JV—to be based in Ranjangaon (Pune)—is expected to begin production of a premium compact car, the Fiat Grande Punto by early 2008. This will be followed by a new Fiat sedan. Tata Motors, which is running out of capacity at its own plant in Pune, will also manufacture its cars at the facility.

    Though the firms did not divulge investment required for this project, experts believe it could be upwards of Rs 2,500 crore. Ravi Kant, managing director, Tata Motors, said, ‘The details of the joint venture like the investments are being worked out and we will be in a position to talk of it when the agreement is formalised. The companies will hold equal stake in JV.’

    The Ranjangaon facility, when it operates at full capacity, will roll out 1 lakh cars and 2.5 lakh engines and transmissions per annum. De Filippis Giovanni managing director Fiat India said, ‘Diesel engines from the Ranjangaon plant will also be supplied to Tata cars manufactured at their Pune plant.’

    Fiat is considering to ‘optimise’ its plant at Kurla, in Mumbai. De Filippis said, ‘We have faced a lot of problems with the Kurla plant and there is a lot of idle capacity here. The plant and the operations are currently being reviewed.’

    The two car makers announced that they will undertake a 60-day study on the possibility of industrial and commercial co-operation in Latin America, which traditionally has been a big market for the Italian automaker.

    Times News Network
    Appendix 5

    Financial Express: Sunday, 22 January 2006

    A Joy Ride for Kids

    Gulf Oil Undertakes a Rally to Brighten up the Lives of Children

    In an attempt to bring cheer to the lives of orphaned children, Gulf Oil Corporation Ltd is flagging of its CSR initiatives this year with Gulf Foster a Child Rally today. This is an annual event by the company.

    This year two orphanages in Mumbai, Our Lady's Home for boys and St Anthony's Home for the girls, have been chosen. The initiative involves taking a child from the orphanage in a car by a family that would like to spend a day with the child. Essentially, this is for rallyists or other sports enthusiasts.

    The route of the drive is simple: All one needs is a car. In each vehicle a family will drive with an orphaned child. In return, the company will give a donation to the orphanage in kind. Sportscraft, the organisers of the event, have decided to donate the amount received by way of entry fee to the orphanages.

    Says N C Sekharan, head of Lubes, Gulf Oil Corporation Ltd, ‘We will utilise this drive as a platform to spread awareness against orphaned and homeless children. This drive will not only provide an opportunity to the destitute kids to enjoy, but also be an occasion to instill compassion in the child of the participating family.’

    Today, 50 children will be off in 50 cars, while other 50 children will ride in a bus, sponsored by Gulf Oil. At the end of the journey in Lonavla, the children will be treated to luncheon, magic show and gifts, et al. The company has planned this as a one-day event. Is it fair to the child who has to go back to his Gulf Oil employees with the children mundane daily activity the next day? ‘We have plans to sponsor these children on a long-term basis’, he says.

    The company's employees are also involved in this annual event. ‘Some of our employees sponsor the child's education, but we don't really get into the details’ he says.

    Sulekha Nair
    Financial Times: Thursday, 11 May 2006
    Fresh Corruption Charges Target Brazil's Deputies

    The year-old corruption scandal surrounding the government of Luiz Inácio Lula da Silva, Brazil's president, has taken a fresh turn with accusations that a third of the lower house of Congress received bribes to make amendments to the country's national budget.

    The accusations were made by Maria da Penha Limo, a former health ministry employee, who was arrested last week, along with 54 other people in a federal police operation known as Operation Bloodsuker.

    Investigators had uncovered a scheme in which 170 federal deputies allegedly used budget amendments to release money to buy ambulances for local health authorities. The ambulances were bought for between a quarter and a third of the amount released and the remainder of the funds were allegedly shared among the scheme's operators.

    Veja, a news magazine, ran a story containing transcripts of police recordings of telephone conversations between alleged operators of the scheme. They identify aides of members of Congress discussing the payment of bribes. In one conversation an aide discusses with one of the operators the possibility of killing a journalist investigating the affair.

    Ms da Penha's accusations, made as part of a plea bargain, takes the case further. Her lawyer said she told investigators that members of Congress received 10 to 15 per cent of the amount they released through budget amendments, in a scheme understood to have involved at least R$110m ($53.5m, £41.9m, £28.7m).

    Opposition leaders seized on the allegations as further evidence of widespread corruption in government. Members of Mr Lula da Silva's administration have been accused over the past year of using illegal campaign finance and of paying bribes to their congressional allies in exchange for their support in Congress.

    ‘This is the theme of the Lula government’, said Geraldo Alckmin, likely to run as candidate for the opposition centrist PSDB in the presidential election due in October.

    Separately, the former secretary of Mr Lula da Silva's Workers' party gave evidence to a Senate corruption inquiry yesterday following a newspaper interview in which he put Mr Lula da Silva among decision makers in the PT when the cash-for-votes scheme was allegedly at its height. Mr Pereira refused to elaborate on his interview in the first part of his evidence, saying that he had not yet read the newspaper interview and so could not comment on it.

    Jonathan Wheatley in São Paulo
    The Moscow Times: Monday, 15 May 2006
    Heads Roll in Anti-Corruption Drive

    Ten senior law enforcement officials were fired Friday as part of President Vladimir Putin's anti-corruption pledge.

    Major Generals Yevgeny Kolesnikov and Alexander Plotnikov, both Federal Security Service deputy heads, were let go Friday, Interfax said. A third Federal Security Service officer, Lieutenant General Sergei Fomenko, was also fired.

    Kolesnikov and Plotnikov dealt with counterterrorism and anti-constitutional activities. Fomenko was the head of the department responsible for fighting drug trafficking.

    Other terminations included those of Mikhail Nikonov, first deputy prosecutor at the Moscow Prosecutor's Office, and six senior Interior Ministry officials. One of those was Sergei Minasyan, the transport police chief of Adler airport.

    The airport, which serves Sochi, was the destination of an Armenian plane that crashed earlier this month in the Black Sea, killing all 113 on board.

    Separately, Alexander Zherikhov, head of the Federal Customs Service, was fired Friday, one day after Putin moved the service from the Economic Development and Trade Ministry and put it under the direct control of Prime Minister Mikhail Fradkov. Andrei Belyaninov, one of Putin's KGB colleagues from his days in East Germany and the current head of the Federal Service for Defense Contracts, replaces Zherikhov.

    More people are likely to be fired, Putin suggested. ‘The work in not over, and not only within customs’, Putin said in televised remarks.

    Putin said the dismissals were not meant to coincide with his state-of-the-nation address, in which he touched on corruption. ‘When I was working on the address, I knew that work [related to the dismissals] was under way’, Putin said.

    The president suggested the Federal Security Service, or FSB, played a central role in all of the terminations.

    Spokespersons for the affected agencies who could be reached by telephone declined to comment.

    Pro-Kremlin political analyst Gleb Pavlovsky said the shake-up showed Putin was serious about tackling corruption.

    Georgy Satarov, head of Indem, a think tank that deals with corruption-related issues, was skeptical of what the shake-up would bring. ‘It's battling corrupt individuals, not corruption’, Satarov told Interfax. ‘The system needs to be changed’.

    Andrei Soldatov, an independent security analyst, said the terminations reflected, above all, the FSB's mounting influence and internal changes at the security agency.

    A counterterrorism law signed by Putin in March made the National Anti-Terrorist Committee the top panel for coordinating anti-terrorism activities. The panel is headed by FSB chief Nikolai Patrushev.

    The new law also put regional FSB chiefs in charge of anti-terrorism efforts, meaning that in the event of a terrorist incident, all security operations would be run by FSB officials.

    The FSB's growing influence was also reflected in the choice of Belyaninov as head of the Federal Customs Service, given that Belyaninov worked with Putin in the KGB's Dresden office in the 1980s.

    Ruslan Pukhov, director of the Moscow-based Center for the Analysis of Strategies and Technologies, called Belyaninov a ‘cashier’ who paid Putin his monthly salary.

    Belyaninov's tenure at Rosoboronexport, the state arms-trading monopoly, from November 2000 to April 2004, ‘undoubtedly’ played a role in his appointment, Pukhov said. His record at the Federal Service for Defense Contracts, which he has headed since leaving Rosoboronexport, also helped him, Pukhov said.

    ‘His task there was to act as a watchdog over how the military brass spent money’, Pukhov said of Belyaninov's work at the Federal Service for Defense Contracts. ‘He was partially successful with this, but not as successful as his work with Rosoboronexport.’

    The appointment solidifies the control of the clan of current and former security officials, many of whom come from St. Petersburg, known as the siloviki, said political analyst Vladimir Pribylovsky, head of the Panorama think tank.

    Pribylovsky said the appointment would do nothing to curb corruption. ‘The corruption will remain, but the money will be going to a different clan’. Pribylovsky said.

    In a related move, Sergei Mironov, speaker of the Federation Council, has taken steps to remove from power Boris Gutin, the representative of the Yamal-Nenets autonomous district legislature; Igor Ivanov, of Primorye region; Arkady Sarkisyan, of the republic of Khakasia; and Alexander Sabadash of the Nenets autonomous district.

    Stanislav Belkovsky, director of the Council for National Strategy think tank, said Gutin and Ivanov were involved in customs-related ‘schemes’. Sarkisyan and Sabadash, he said, are being punished for carving out their own power bases within the security agencies.

    Carl Schreck and Valeria Korchagina Staff Writers
    Appendix 6

    South China Morning Post: National, Tuesday, 18 July 2006

    Hu Hails ‘Practical’ Three-Way Talks

    Common Issues with Leaders of India and Russia Make for Easy Consensus

    China, India and Russia hailed an unprecedented three-way meeting on common issues of energy, economic development and fighting terrorism yesterday as a step towards stronger ties.

    The meeting between President Hu Jintao, Russian President Vladimir Putin and Indian Prime Minister Manmohan Singh came amid a series of bilateral and multilateral talks Mr Hu held on his last day in the Russian city of St Petersburg with leaders of G8 countries and counterparts from invited developing countries.

    Speaking after the meeting at Constantine Palace, Mr Hu said: ‘The three countries had a very practical discussion. The most important thing is we have so many common interests which help us reach consensus easily.’

    By consensus, the Chinese president was referring to global energy security, education for innovative societies in the 21st century and the fights against infectious diseases and terrorism.

    ‘After today's meeting, I believe that we can further develop our ties with each other very well’, Mr Hu said.

    Mr Putin reiterated the importance of China's and India's participation at the Group of Eight summit. ‘Without China's and India's participation, the G8 summit couldn't have a successful and comprehensive discussion on economic and security sectors’, he said.

    Jiang Yuechun, director of the Division of World Economy at the China Institute of International Study—a Foreign Ministry think-tank—said the close ties between China, Russia and India meant more clout for developing countries when they co-operated with rich countries on the international stage.

    ‘We know the three countries have a similar standpoint on fighting terrorism and other common-interest issues’, Professor Jiang said.

    Although Mr Hu and Mr Putin had met at least five times in the past year, both leaders also took time to meet separately before Mr Hu heads back to Beijing.

    Professor Jiang said this was because China and Russia were traditional strategic partners and had many mutual interests.

    ‘Sino-Russian relations have been built on traditional friendship and common interests, especially on how China's soaring economic development has needed Russia's energy support’, he said.

    ‘It is very common for the two leaders to be so close when they appear at various occasions on the international stage.’

    Gui Yongtao, an expert from Peking University's Faculty of International Relations, said it was very important for the three countries to make commitments on energy security and the fight against terrorism.

    He said the fight against terrorism could not succeed without the co-operation of the three countries because they were also three rising powers, and India was set to follow in China's footsteps as a rapidly developing economic force.

    ‘China and India will co-operate with G8 but also keep their distance from it’, Mr Gui said.

    He added that the time was not yet for China to join the ‘rich men's club.’

    Minnie Chan in St Petersburg
    The Times of India: New Delhi, Friday, 16 June 2006
    Nicholas Piramal to Buy Pfizer's UK Unit
    To Become the Largest Contract Manufacturer for American Pharma Major

    Mumbai/New Delhi: Pharmaceutical major Nicholas Piramal India Ltd (NPIL) has struck a deal to acquire one of Pfizer's plants in Britain for an undisclosed amount. The transaction, which makes NPIL the largest contract manufacturer for Pfizer, is expected to be completed by the weekend. It is also expected to boost revenues by $350 million over the next five years.

    The deal includes a supply agreement with Pfizer, which will continue to buy drugs from the plant, at Morpeth in northeastern England, until 2011. Nicholas Piramal's UK unit, NPIL Pharmaceuticals (UK), will acquire the Morpeth facility on an asset purchase basis. The acquisition will be funded through internal accruals.

    The announcement lifted Nicholas Piramal shares to an intra-day high of Rs 172.5 on the BSE on Friday. The scrip closed nearly 8% higher at Rs 168.1.

    The Morpeth site is one of Pfizer's integrated facilities, and houses end-to-end production and supply chain capabilities that cover active pharmaceutical ingredients, finished dosage, packaging and distribution. Pfizer's website states that, the plant, set up in 1960s, manufactures drugs for pain control, arthritis and ulcer prevention.

    ‘As the facility has USFDA and UK MHRA nods along with a packaging division, it will help us sell products in 106 countries’, said Ajay Piramal, chairman, NPIL. The deal will make Nicholas Piramal the biggest supplier within Pfizer's global contract manufacturing network. It will also help Nicholas emerge as one of the world's top 10 pharma outsourcing companies with manufacturing revenue exceeding $200 million a year.

    ‘We expect revenues to be around half a billion for current fiscal, after the deal. Also, contract manufacturing segment will contribute 50% to revenues’, Piramal said.

    Times News Network
    The Times of India: New Delhi, Tuesday, 6 June 2006
    ‘There's Need for Better Ties with India’

    Playing down the strained ties with China and South, Shinzo Abe, the chief cabinet secretary, has emphasised the importance of strengthening diplomatic ties with Asian countries, like India and Australia, that have ‘common values’ with Japan.

    In a recent interview with the Nihon Keizai Shimbun, Japan's major economic daily, Abe said that Japan would continue to do business with China, but called China a destabilizing factor in Asia.

    ‘We don't share basic values like freedom and human rights’, he said. ‘If you ask me whether the rule of law is established there, it's not.’

    By contract, in a recent speech, Yasuo Fukuda, a former chief cabinet secretary, said that Japan needs to revise its policy toward the rest of Asia.

    Mentioning the Asia policy that was carried out by his father, Takeo Fukuda, a prime minister in the 1970's, he said that Japan must resume ‘heart-to-heart’ dialogue with its neighbours and ultimately build an East Asian community.

    Norimitsu Onishi NYT News Service
    The Times of India: New Delhi, Wednesday, 14 June 2006
    China Moving up the Trust Ladder?
    Neither are we a Threat to Them, nor are They a Threat to US, Says Pranab

    New Delhi: In the not too distant past, one defence minister (read George Fernandes) famously dubbed China the ‘potential threat number one’ for India. His successor, Pranab Mukherjee, however, is now all gung-ho over embracing the Red Dragon as a strategic partner.

    Though the normally hawkish Indian defence establishment still keeps a watchful and concerned eye on the ever-growing Chinese military activity in the Tibetan Autonomous Region as well as the Indian Ocean, there is now a palpable sense of easing of tensions.

    The ‘threat perception’ from China is now considered to be the lowest ever since the 962 conflict, with the possibility of an armed conflict not figuring on the radar screen at all. ‘Neither are we a threat to them (China), nor are they a threat to us’, says Mukherjee.

    ‘We do believe there is enough strategic space for both of us to develop’, said Mukherjee, who has just returned from a trip to China, which saw him travelling to military establishments at Beijing, Dunhuang, Lanzhou and Shanghai.

    Moves are now afoot in South Block to institutionalise defence and military exchanges, including training programmes and joint exercises with the 2.5 million-strong People's Liberation Army (PLA), which is more than double the size of the Indian forces.

    Towards this end, Chinese military observers have already witnessed an Indian armoured exercise in Rajasthan. There are now plans to hold joint exercises with PLA, possibly in the counter-terrorism arena, say sources.

    As per the MoU signed between Mukherjee and his Chinese counterpart Cao Gangchuan on May 29, the two countries will now have an annual defence dialogue for ‘a frank exchange of views on all military matters of mutual concern.’

    Ask Mukherjee about the well-known Chinese help to Pakistan in its nuclear and missile programmes and he brushes it aside. ‘We are aware Pakistan received some support from China in its various programmes, including weapons. At the same time, it has to be recognised that they (China) are interested in developing defence cooperation with India’, he said.

    What about the rapidly-modernising PLA, with its armoury of nuclear-tipped missiles? ‘They have their own programmes, we have ours…But nobody is thinking in terms of an armed conflict. The basic understanding is that it's better to live in peace than in tension’, said Mukherjee.

    The CBMs along the unresolved 4,057 km Line of Actual Control (LAC) with China, despite occasional pinpricks by PLA, are on a firm footing. ‘They will be further strengthened’, said Mukherjee.

    The military protocol signed during Chinese Premier Wen Jiabao's visit here in April 2005, in fact, goes far ahead of the earlier November 1996 agreement on maintaining peace and tranquility along the LAC. It lays down that the two armies will ‘exercise self-restraint’ and take ‘all necessary steps’ to avoid any escalation on the LAC.

    The steps include immediate cessation of activities, no threat or use of force, return to bases and informing their respective HQs. The protocol also tackles air intrusions in a similar fashion, with flag meetings within 48 hours for seeking clarifications.

    Rajat Pandit/TNN
    The Times of India: New Delhi, Friday, 16 June 2006
    Enter, the Dragon
    Ahmadinejad in China for N-Programme Support

    Shanghai: Iranian president Mahmoud Ahmadinejad arrived in Shanghai, renewing the focus on the role China may play in resolving the standoff over the Islamic republic's nuclear programme.

    In a suggestion that China was concerned the Iran issue would overshadow everything else at the Shanghai Cooperation Organisation meeting, officials seemed eager not to play up expectations. ‘I don't believe having discussion or not having discussion of the Iran nuclear issue is the determinant of the relevance of this conference’, foreign ministry spokesman Liu Jianchao told a briefing in Shanghai.

    Ahmadinejad is only a guest at the summit of the Shanghai Cooperation Organisation, which groups China, Russia, and four Central Asian states. Iran is an observer nation along with Pakistan, India and Mongolia.

    Russian president Vladimir Putin, Pakistan's Pervez Musharraf and the leaders of Kazakhstan, Kyrgyzstan and Tajikistan and Uzbekistan were all in town for the meeting. But attention was expected to be on Ahmadinejad more than anyone else with the hardline Iranian leader slated to hold his first meeting with Chinese president Hu Jintao on Friday following the summit.

    It was unclear what might be achieved by the talks in regards to Iran's nuclear programme, argued David Zweig, a China expert at Hong Kong's University of Science and Technology. It's good to have the two leaders sit and make Ahmadinejad understand the need not to go down the nuclear road, he said.

    AFP
    Moscow, Tehran to Discuss Nuke Mess

    St Petersburg: Russian president Vladimir Putin will meet with Iranian president Mahmoud Ahmadinejad on the sidelines of the summit of the Shanghai Cooperation Organization in that Chinese city, presidential aide Sergei Prikhodko said.

    Prikhodko made it clear the presidents will discuss the Iranian nuclear problem among other issues. ‘Putin's meeting with Ahmadinejad will focus on issues of bilateral cooperation including the fuel and energy sphere, the development of Caspian resources, transportation and transport corridors, as well as Russia's participation in the solution of Iranian energy problems’, Prikhodko added.

    ‘It is planned that some international issues will be discussed as well, such as the talks over the development of the Iranian peaceful nuclear program and the situation around Iraq’, the aide said.

    Meanwhile, major powers will coax Iran on the nuclear offer at IAEA. The powers—the five UNSC permanent members plus Germany—hoped a debate on Thursday of the IAEA's governing board would help persuade Iran to accept their offer.

    ‘We will be keeping our statements to the board low-key to encourage Iran to come up with a positive response’, said a EU3 group diplomat. Iranian foreign minister Manouchehr Mottaki told his Italian counterpart the offer was ‘a significant change of approach toward Iran.’

    AFP Agencies

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    About the Author

    Stefano Pelle is Vice President and Chief Operating Officer, Business Unit Russia and South Asia, Perfetti Van Melle Group, and Chairman of Perfetti Van Melle, India. He has been living and working in South Asia since 1998, having worked previously in several MNCs, including Johnson & Johnson and Danone. He has had extensive experience in the FMCG and services sector, both in developing and in emerging countries. Before joining the Perfetti Van Melle Group, he headed the High Speed Division of the Italian State Railways. In recognition of his work in South Asia, he was made a Knight Commander by the President of the Italian Republic in 2006.


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