Despite developed markets growing faster than emerging markets (excluding India and China) since 2015, CEOs are still looking to emerging markets for growth. Our most recent CEO Outlook Survey indicates that three-quarters of CEOs in the US (74%) and over half of CEOs across the rest of the world are prioritizing emerging markets for geographical expansion over the next three years.
The higher business uncertainty and political risk of investing in these countries have been tempered by the growth potential of their underlying socioeconomic and geographic fundamentals: fast-growing consumer bases and cheaper labour forces, and recently, the natural (technologically-aligned) resources of the future, such as the DRC’s cobalt reserves. But, the ‘geo’ part of politics – and more specifically, this geopolitical recession we find ourselves in – will start to affect the growth potential of these markets in much more interesting and nuanced ways, particularly for ‘Made in X’ companies.
Where are CEOs looking? One-third of US CEOs are prioritising Central and South America, compared to Eastern Europe (20%) and the Middle East (18%). It is a similar picture for other economic powerhouses: CEOs in China, Germany, India and Japan are looking to Central and South America in the first instance (33%, 44%, 40% and 39% respectively). Although only a tenth of CEOs are looking to Africa and the Asia Pacific respectively, it’s in these areas that we see the first hints of how companies will need to operate in order to harness growth in a G-Zero world.
Take the African continent. It is not a completely rosy picture to be sure. The World Bank now classifies 18 countries at high risk of debt distress (debt-to-GDP exceeding 50%), and much broader conversations are needed about the comparative exposure of the continent to ESG risk and the role job creation will play in cementing social stability. But Africa’s population has already exceeded the 1 billion mark. By 2020, Africa will more than double Latin America’s population, and future growth, particularly in the working age population, is anticipated to be much stronger (estimated 2.76% CAGR FY20-FY30 compared to 0.72%).
Unsurprisingly, this growth is translating into infrastructure needs: estimates from the African Development Bank place them at around $130-170 billion per year. Now enter geopolitics: nearly a quarter of infrastructure spend in Africa in 2017 came from China ($19.4bn). China is estimated to be the single largest creditor nation in Africa, holding 20% of African government external debt, having issued around $132 billion in state and commercial loans between 2006 and 2017.
Why does that matter to CEOs? Elsewhere in the world we have already witnessed the convergence of economic, trade and investment policy with national security, particularly as it relates to technology. The interconnection – and indebtedness – of some emerging markets to world powers has the potential to lead to a splintering of business (particularly technological) architecture and standards as each country more closely aligns to those of its economic partner.
This will make it harder for international (or even regional) businesses to operate while straddling these lines. It will also make it harder for a ‘Made in X’ company to operate in a market aligned to the economic (and possibly political) model of Country Y. And as trade tensions encourage a shift from ‘just in time’ to ‘just in case’ supply chains and begin to drag down global growth, it will also be harder for businesses to realise the growth they seek from these regions.
But as much as we talk about geopolitical risk, we should also highlight the potential for geopolitical-fuelled growth. For some companies, sectors and markets, a tech cold war or continued trade tensions could create major opportunities in new markets and allow them to break into previous strongholds. Dutch merchant Louis Dreyfus Company, for example, reported an increase of 12% in soybean profits on the back of recent trade dislocations.
CEOs should identify geographic hotspots that can either ‘go it alone’ or are more closely aligned to their existing tangible and intangible footprint to harness this geopolitical volatility to their competitive advantage. And when looking to new markets, consideration should be given to not only the usual regulatory and economic exposure, but also interconnected environmental and political risks, to decide which emerging markets will be most able to weather the world turning inwards – and offer the greatest opportunity for growth.