ARTICLE - BUSINESS IN FRAGILE MARKETS

INSTABILITY: KEY TO COPING IN FRAGILE MARKETS
(Financial Times) - By Robert Batchelor

For many companies operating in the developing world, day-to-day realities require them to deal with weak and sometimes corrupt governments, inadequate physical infrastructure and an absence of the rule of law.

In addition to these chronic failings, revolution and civil war have broken out across many countries in north Africa and the Middle East, increasing the challenges facing managers. Add natural disasters to the mix – from earthquakes in Haiti to monsoon rains and flooding in Pakistan – and the resilience of governments and business are tested to the utmost.

Companies might be tempted to avoid such challenging environments but sources of materials draw them in and growing populations provide the markets that keep them there. As the economies of these countries develop, managers reason, businesses that were there from the outset will be well placed to benefit from growth.

But doing business in these fragile markets does require a proper analysis of the risks and – to counter sudden disasters – sound preparation to make sure that systems are robust and will work in an emergency.

GlaxoSmithKline, the pharmaceuticals group, established a new business unit in July 2010 to bring together its operations in the nearly 40 countries where it is active that are among the group defined by the UN as least developed.

“We have put all these countries together so as to get more focus,” says Allan Pamba, director of public engagement and access initiatives. “Our primary focus is on access in a sustainable way. We used to run Bangladesh, with revenues of £20m [$33m], with India, with revenues of £800m. Bangladesh used to be treated almost as a rounding error.”

Instead of maximising profit per pill, GSK has capped prices of its patented products at no more than 25 per cent of the level in western Europe with the aim of achieving more widespread distribution throughout a larger population.

Twenty per cent of profits from these activities will be reinvested in the healthcare infrastructure of the developing countries.

“We recognise that building this focus is good for our patients and for our business,” says Mr Pamba. “These countries are powering on and we want to be there from the beginning.”

In Kenya, GSK has worked with the HealthStore Foundation to create 80 clinics to bring healthcare to more people. Experienced nurses and community health workers are invited to invest in the clinics, which are run as for-profit business franchises. “This is an example of how we help the private sector grow in countries where we can reach new patient populations,” says Mr Pamba.

Unilever, with a 100-year history of operating in many overseas markets, does not regard itself as an outside multinational but as a part of the local community.

But it too is cranking up programmes to work more closely with local suppliers.

It plans to link more than 500,000 smallholders and small-scale distributors into its supply chain by 2020.

“We believe that the most positive intervention in terms of addressing rural poverty is working with small farmers to improve their yields,” explains Gavin Neath, senior vice-president for sustainability. “We provide the agronomic expertise and the training. But the farmers have to move to global levels of quality and price. This is not charity.”

In Azerbaijan, Unilever is working with Oxfam to help farmers improve their methods of growing onions to a quality and price that will meet global standards. In the Punjab it is working with 6,000 farmers growing gherkins that are bottled and sold under the company’s Amora brand.

As well as providing professional skills, Unilever provides further support for often remote communities in the form of schooling and HIV/Aids programmes.

“We employ 20,000 people on tea plantations in isolated areas of the Rift Valley in Kenya. Having an isolated labour force brings with it its own responsibility,” says Mr Neath.

These are long-term programmes but emergencies require an instant response. When the Haitian earthquake of January 2010 destroyed the country’s banking network, Citigroup mobilised aircraft, helicopters and armoured cars to bring in cash.

After 11 days the bank reopened its local branch to provide financial support to healthcare and emergency support organisations and to allow local groups to meet employee payrolls, expenses and petty cash.

Citi established cash clearing arrangements through the Dominican Republic and its regional processing centre in Tampa, Florida.

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CASE STUDY: SABMILLER SET TO TOAST AFRICA'S NEWEST NATION

Political uncertainty could not be greater than in a newly formed country that has emerged from decades of conflict and civil war. When Southern Sudan achieves formal independence on July 9, revellers may mark the occasion with a glass of White Bull Lager, brewed by SABMiller in Juba, capital of the new nation.

But Southern Sudan remains an extremely poor country that will continue to need the input of companies such as the South African brewer. SABMiller is working with 2,000 smallholder farmers to turn cassava, a tuber that is traditionally a subsistence crop, into a cash crop. The cassava will replace some of the malted barley now imported for beer-making.

“We make sure the farmers plant approved varieties of disease-resistant cassava,” says George Mukkath of Farm-Africa, a charity that is working with SABMiller. “We want to increase the yield from three to nine-20 tonnes an acre. At present 80 per cent of the raw materials to produce beer are imported.”

Mr Mukkath calculates that the farmers will earn $300 a year from the deal to supply the brewery – a good level of income. “These farmers are assured of a market for their produce and the $300 does not take account of what they can get from selling the rest of their crop to other buyers. We are working with the farmers to help them link up with local markets. There will be a lot of lessons learnt from this partnership.”

“This is an economy based primarily on imported goods but as it develops more of these items will become local products,” says Ian Alsworth-Elvey, managing director of Southern Sudan Beverages, SABMiller’s local subsidiary.

The company began brewing the country’s first home-produced beer in 2009 and the early years have been challenging. The initial $37m investment was followed by an additional $15m earlier this year to boost capacity to 500,000 hectolitres of beer a year. It can also make 320,000 hectolitres of carbonated soft drinks annually. These activities have created jobs for 200.

“In the beginning a lot of the legislative framework was not in place,” says Mr Alsworth-Elvey. “It was all about building up relations with the government. But now there is legislation covering investment promotion, taxation and intellectual property. Previously everything was governed by Islamic sharia law.”

A land lease agreement with the local community ensures that they receive royalty payments from the brewery development while the new legislation requires for the first time that excise duty be paid on the sale of alcohol.

Mr Alsworth-Elvey sees SABMiller’s involvement in the establishment of this framework of legislation as creating a template for future inward investment into Southern Sudan. “There has been a dramatic change in the way potential new investors will be able to do business,” he says.

“The government has created a ministry of investment. That is pretty unique.”