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Emerge, splurge, purge
March 14, 2014 11:48 AM   Subscribe

Western firms have piled into emerging markets in the past 20 years. Now comes the reckoning
Although the average company has prospered, there have been disasters; plenty of firms and some whole industries need a rethink. The emerging-market rush may end up like a giant version of the first internet boom 15 years ago. The broad thrust was right but some big mistakes were made.
posted by infini (16 comments total) 13 users marked this as a favorite

 
The rich-world firms that remain will need to make their business models weatherproof, not just suited for the sunny days of a boom. That means shifting even more production to emerging markets and borrowing in local currencies—both are a natural hedge against currency turbulence.

In other words, behave like members of the local community, invest in improving the market and not just shoveling profits back to the first world HQ.

The Economist is hyping this up a bit, but even so it will be a net good if international companies apply more of their profits locally and develop those markets, upping everyone's game.
posted by chavenet at 12:14 PM on March 14


That was pretty all over the place while talking about all over the place. So pretty much the Economist!
posted by srboisvert at 12:20 PM on March 14 [4 favorites]


This is interesting. I'm not sure about some of the technical details:

Companies in the second bucket face a sharper slowdown. They are in cyclical and capital-intensive industries. Fiat Chrysler’s profits in Latin America, a vital cash cow, halved in 2013. This week Volkswagen and Renault joined the ranks of Western carmakers warning of weak emerging-market sales. Last month Peugeot wrote off $1.6 billion of assets, mainly in Russia and Latin America.

Does the part in bold mean that Peugeot is saying, our sales are not where they should be in these currently-weak markets, so we're acknowledhing these assets (capital infrastructure, I'm guessing? Manufacturing equipment and facilities?) as costs now, in order to avoid unpleasant surprises about depreciation in the future? Or, it basically means they're acknowledging that those operations won't meet earnings, so ipso facto they would be overvalued if they didn't write them off?
posted by clockzero at 12:22 PM on March 14


Last month Peugeot wrote off $1.6 billion of assets, mainly in Russia and Latin America.

Does the part in bold mean that Peugeot is saying...


No, that's just bribe money.
posted by Behemoth at 12:32 PM on March 14



Last month Peugeot wrote off $1.6 billion of assets, mainly in Russia and Latin America.

Does the part in bold mean that Peugeot is saying...

No, that's just bribe money.


Companies should really stick to production activity in their pristine domestic markets than venture overseas into corruption and slick accounting.
posted by infini at 12:42 PM on March 14 [2 favorites]


While Nokia was busy innovating better ways to get their phones into the hands of folks in Africa, Apple was building the iPhone. There's a lesson in there somewhere.
posted by Space Coyote at 1:17 PM on March 14 [2 favorites]


"Emerging markets" has for some time been the go-to idea for uncreative MBA types who end up over their heads in leadership positions, and don't have any better ideas. Cf. Nokia.

It's basically: can't think of anything better to do? Go to Asia! Competitors already there? How about South America! There too? Well, uh, Africa! There are lots of people in Africa! Go!

It makes a good board presentation; shareholders eat that shit up because expanding into a fresh new market seems, on the surface anyway, a whole lot more attractive than slugging it out in the developed world. There's a sort of colonialist attitude: everyone wants to "land and expand" in those untapped areas on the other side of the map, mine them for their rich veins of consumers, and ship the profits back home.

That many of those firms end up doing poorly should be no less surprising than 19th century European gentlemen-explorers dying of malaria. Many of them have no goddamn clue what they're doing.
posted by Kadin2048 at 1:48 PM on March 14 [9 favorites]


The important thing here is that the Economist (a lagging indicator if there ever was one) is saying that emerging markets are played out and crashing. That's a pretty good sign that the bottom is (nearly) at hand and emerging assets are (almost) as cheap as they're going to be...

If I was a billion dollar scrappy hedge fund, I know where I'd be bargain-shopping this week.
posted by RedOrGreen at 1:53 PM on March 14 [1 favorite]


With emerging markets bottoming out and the developed markets saturated and suffering still, where will they seek growth next is their concern. What's left?
posted by infini at 1:58 PM on March 14


While Nokia was busy innovating better ways to get their phones into the hands of folks in Africa, Apple was building the iPhone. There's a lesson in there somewhere.

Unfortunately, that lesson appears to be "don't bother selling to the low-income billions when you can easily make money catering to the rich few." It's a lesson we're seeing again and again as income disparity grows. :/
posted by phooky at 2:00 PM on March 14 [9 favorites]


"Emerging markets" has for some time been the go-to idea for uncreative MBA types who end up over their heads in leadership positions, and don't have any better ideas.

Not new of course; there's a reason "Failed In London, Try Hong Kong" became an acronym.
posted by MartinWisse at 2:08 PM on March 14 [2 favorites]


Does the part in bold mean that Peugeot is saying
How about a real answer? The earnings release from Peugot goes into some detail about the impairment. Basically they are taking assets from 8.9 to 7.8 billion due to "worsening automotive markets and unfavorable forex in latam and russia". In the conference call they bring more detail where 500mil is FX and the rest is real impairment.

So for the FX its likely swaps - they are hedging their exposure to say the Ruble, it goes down, so the value of their swaps declines. Thats the whole point, but its still an impairment.

Perhaps an easier way to think about writeoffs and impairments are in the energy sector. You buy an oil well for $1million, with oil at $100. You have that on the balance sheet at $1million. Then oil moves down to $50, your well is now worth say $500k. You cannot continue to tell your investors that the well is worth $1million, so you write it down to $500k. That has to go across the income statement as a loss of $500k.

The same also happens with say a big technology acquisition. HP buys Autonomy for $11billion, holds it on the balance sheet at $11billion. Then they find out Autonomy was cooking the books and its really worth $1billion, so HP has a $10bil writeoff (and loss). (True story btw).

Hope this helps.
posted by H. Roark at 2:17 PM on March 14 [4 favorites]


What's left?
posted by ZenMasterThis at 2:35 PM on March 14


What's left?

Finacialization of course.
posted by srboisvert at 3:06 PM on March 14


Unfortunately, that lesson appears to be "don't bother selling to the low-income billions when you can easily make money catering to the rich few." It's a lesson we're seeing again and again as income disparity grows. :/

Phooky, that's what I think every time I hear "Art History" used as a figure for 'useless frill that will never get you a job' -- we're moving, rapidly, to an economy based on a population of aristocrats and peasants, with 99 people sleeping 5 to a room to every 1 person in a 20 room mansion. In that kind of market, art galleries and antique houses (and haute couture) will be a booming market.

In essence, in an economy of aristocrats, you need to become a courtier: manage money, manage spending, and maybe you'll be allowed to take the plutocrat's castoffs to the consignment store and make enough to buy a used car.
posted by jrochest at 5:58 PM on March 14 [3 favorites]


Unfortunately, that lesson appears to be "don't bother selling to the low-income billions when you can easily make money catering to the rich few." It's a lesson we're seeing again and again as income disparity grows. :/

I have noticed a slew of articles about this hollowing out of the economic middle. You can make money selling to the very poor or the very rich, but the traditional middle class is dwindling as a market. There was a really interesting article about the business of operating mobile home parks (the housing of last resort in the US) in the NYTimes magazine, for example, where it is possible to extract huge rent increases from the poor because they have no better options.
posted by Dip Flash at 7:30 AM on March 15


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