The business prospects in emerging markets are as good as ever. However, China is no longer the undisputed favourite for companies seeking markets abroad, a new report has said.
Credit insurer Atradius said that other emerging countries were also being seen as increasingly attractive.
Sixty per cent of surveyed company representatives continued to give top priority to China over the last three years, followed by India, with 41 per cent of respondents and South-East Asia, excluding China, by 26 per cent.
However, according to the company’s latest research there are signs of a change in the trend as only 48 per cent intend to focus primarily on China in the future.
In other words, China remains the top target, but by a far smaller margin. Forty five per cent will focus on India in the future, 25 per cent on Central and Eastern Europe, and 24 per cent on Southeast Asia (excluding China) and Russia.
Experts believe that change is on the cards for China. In the future the country will be more interesting to companies as a growing consumer market than as a cheap manufacturing location.
“Some companies have realised that multinationals can achieve success much faster in smaller markets such as Thailand, Vietnam or parts of South and Central America,” said Peter Ingenlath, Atradius’ chief risk officer and vice chairman.
This view is based on findings of the recent international study “Promise or peril – the lure of the emerging markets” produced by Atradius.
A recession would also hit emerging markets.
“The study findings show that an investor’s choice of country is often driven more by emotion than by sound risk management,” according to Mr Ingenlath.
“Our study raises the awareness of the special risks in emerging markets and can help companies to be better equipped to deal with them,” he added.
Despite the tremendous optimism many companies have about particular countries, he said the study clearly revealed that “the local risks are underestimated by many companies”.
While emerging markets are now better prepared to withstand a slowdown in developed markets and avoid being dragged into a crisis, “they would not be able to shrug off a deeper and longer recession.”
In fact, many experts forecast negative economic growth — at least for a number of quarters in succession — as a result of the sub-prime crisis in the USA.
On the one hand 72 per cent of respondents believed their companies would be able to profit from growing opportunities in emerging markets in the next three years. On the other, however, only 30 per cent believed that the risks would lessen over the same period. Sixty nine per cent believed that the level of risk would stay the same or become even more acute.
Ninety two per cent of respondents identified macroeconomic factors and 91 per cent political instability or opaque rules and excessive bureaucracy as significant or very significant obstacles to success. Operatively significant or very significant obstacles identified by experts included poor infrastructure (84 per cent), inadequate training (75 per cent) and credit risks (74 per cent).
Fifty five per cent anticipate sales growth of over 16 per cent.
There is a great deal of optimism despite all these risks. This optimism is particularly apparent in the sales which respondents expect to make in emerging markets in the next three years. While 42 per cent of companies reported annual sales growth in excess of 16 per cent in the last three years, as many as 55 per cent of companies expect the same level of growth in the next three years.
Ninety per cent of companies say that growth opportunities are important or very important when it comes to planning potential activities in these markets. Other important aspects are the ability to serve international customers better (58 per cent) and the ability to avoid increasing competitive pressure in domestic markets (57 per cent).
The trend towards investing in emerging markets remains unchanged. Total capital flows into emerging markets were higher in 2007 than ever before, according to figures from the Institute of International Finance (IIF), around £400 billion. Of this, around £126 billion came in the form of foreign direct investment (FDI) — an increase of more than 50 per cent compared to 2006. When it comes to market entry strategies, 29 per cent of surveyed companies favoured strategic alliances or partnerships while 23 per cent preferred opening a representative office and 14 per cent importing goods.