The Institutional Capital model and the Emerging Economies
By: Amit Bhushan Date: 25th Aug 2014
The global market is currently awash with liquidity. With the currency injection continuing albeit at a lower pace than earlier in the developed world like the US, Japan and Eurozone; and promise of steady low interest rate regime, the 'business managers' are actually having field day competing with investment bankers to identify 'valuable' buying opportunities within domestic economies as well as abroad. The investment bankers who dig in their hands in large stakes and often 'controlling stakes' in businesses, may have to 'cash out' at some stage since their businesses are based on 'value unlocking' and therefore the looming 'end' of 'quantitative easing' in the US may have significance unless there are even stronger bets that Eurozone is likely to come up with their own stronger version. This is because at least some of these investment bankers may want to get out when the market is still awash with liquidity i.e. towards the end of easing, then wait when impact starts to subside and becomes almost a must in scenarios when interest rates begin to rise. Of course not all investment would be behaving as predicted in this tumultuous period. The banks may want a competition between healthy domestic businesses to rival aggressive businesses from emerging markets to cash out at decent valuations and of course such themes are being built up especially in context of businesses from China and India (& this may include other industrialized countries as well).
The Chinese businesses are better placed having already invested in globalizing themselves and evolving scale, processes and models that can be deployed to work across operations, globally. They also have resources to take the investment calls basis stronger balance sheets and better placed in terms of maturity to fulfill global demand. Therefore getting brands & technology alongside local operations in developed markets work to their advantage and enhances their ability to scale further. However, entry of Chinese competition can tilt the domestic market dynamics in some of the developed world countries to a large extent and may lead to large retrenchments in the industry because it brings in Chinese cost and standards in components and sub-assemblies as well as 'off-shore manufacturing/working model' in part due to cultural/language issues; for which some competitors in developed world may not be ready. It therefore faces political resistance. The other area that opens up is that some of these weaker units invest in off-shore units in competitive locations to develop manufacturing operations for parts and sub-assemblies so that they source cheaply and become competitive. This is a more acceptable solution but meets political resistance due to job losses involved at the lower strata which tends to vote en-block. Lack of domestic job creation avenues keeps pressure buildup. Development of tourism and services to some extent wards of the pressure, but the same is no longer enough to sustain the likely impact.
Meanwhile since there may still not be enough credit worthy enterprises who should be supported with their quest to invest abroad (i.e. having globalized operating ability to manage sustainably and profitably) so the option of financing 'foreign entities' with a promising and politically digestible business model may still be a promising idea provided of course these entities have some proven mettle to sustain such models. The small and mid level businesses from India and other emerging markets who have proved their worth in having a sustainable business model in India, need to invest heavily in evolving processes for global operations if they want to profit from such opportunities. At present, most such enterprises have domestic orientation with 'small exports/imports window' which takes care of any emerging trade opportunities. The consideration of 'exports/imports' as a strategic option including well defined processes for 'acquiring vendor as well as customers' is almost lacking in most of the SMEs (especially for globalized models). Therefore considerations about running globally disbursed operations and having capabilities to deal with such issues might simply be out of question. This is even when most such units are plagued with high cost of funds (compared to their global peers) and global operations has a potential advantage that can help them bring down the cost of capital substantially. Getting hold of proven technologies, brands as well as 'mature & time-tested' processes are some of the other advantages.
Much of the institutional control on Capital still lies in the hands of Developed world entities although this is increasingly being challenged. These entities benefit out of 'trading' opportunities by turning the 'management controls' to those 'managements' who have stronger business case for ownership and well defined processes including evolved business models to raise enough credit to 'buy'. Indian businesses, who have proven their worth in 'global iron and steel sector' and have several other smaller but well documented successes as well, may want to benefit from such opportunities. As far as global bankers are concerned, they would certainly benefit if there is more competition for 'assets' that are on 'block'; or if more entities meet the borrowing risk threshold (provided they of course have transparent business procedures with mature business models); or if they can have more 'trades' including a role for their business models to enter emerging world markets with clients who can serve as important beachheads. It all puts a premium to globalized approach to business.
For this to happen, the smaller and mid-sized businesses will have to move from transaction oriented approach to partnership oriented approach with their customers as well as vendors so that they evolve a more sustained business model. They will need to invest in having more integrated financial reporting processes so that the values are cascaded seamlessly to investors in transparent manner. A supportive regulatory regime which puts a premium on transparency in 'reporting' will actually go a long way since this would bring greater trustworthiness on the 'numbers' and therefore improve credibility. Having proven competitive advantage will be a driving force that will help shape up meeting the global requirements to raise the game…
By: Amit Bhushan Date: 25th Aug 2014
The global market is currently awash with liquidity. With the currency injection continuing albeit at a lower pace than earlier in the developed world like the US, Japan and Eurozone; and promise of steady low interest rate regime, the 'business managers' are actually having field day competing with investment bankers to identify 'valuable' buying opportunities within domestic economies as well as abroad. The investment bankers who dig in their hands in large stakes and often 'controlling stakes' in businesses, may have to 'cash out' at some stage since their businesses are based on 'value unlocking' and therefore the looming 'end' of 'quantitative easing' in the US may have significance unless there are even stronger bets that Eurozone is likely to come up with their own stronger version. This is because at least some of these investment bankers may want to get out when the market is still awash with liquidity i.e. towards the end of easing, then wait when impact starts to subside and becomes almost a must in scenarios when interest rates begin to rise. Of course not all investment would be behaving as predicted in this tumultuous period. The banks may want a competition between healthy domestic businesses to rival aggressive businesses from emerging markets to cash out at decent valuations and of course such themes are being built up especially in context of businesses from China and India (& this may include other industrialized countries as well).
The Chinese businesses are better placed having already invested in globalizing themselves and evolving scale, processes and models that can be deployed to work across operations, globally. They also have resources to take the investment calls basis stronger balance sheets and better placed in terms of maturity to fulfill global demand. Therefore getting brands & technology alongside local operations in developed markets work to their advantage and enhances their ability to scale further. However, entry of Chinese competition can tilt the domestic market dynamics in some of the developed world countries to a large extent and may lead to large retrenchments in the industry because it brings in Chinese cost and standards in components and sub-assemblies as well as 'off-shore manufacturing/working model' in part due to cultural/language issues; for which some competitors in developed world may not be ready. It therefore faces political resistance. The other area that opens up is that some of these weaker units invest in off-shore units in competitive locations to develop manufacturing operations for parts and sub-assemblies so that they source cheaply and become competitive. This is a more acceptable solution but meets political resistance due to job losses involved at the lower strata which tends to vote en-block. Lack of domestic job creation avenues keeps pressure buildup. Development of tourism and services to some extent wards of the pressure, but the same is no longer enough to sustain the likely impact.
Meanwhile since there may still not be enough credit worthy enterprises who should be supported with their quest to invest abroad (i.e. having globalized operating ability to manage sustainably and profitably) so the option of financing 'foreign entities' with a promising and politically digestible business model may still be a promising idea provided of course these entities have some proven mettle to sustain such models. The small and mid level businesses from India and other emerging markets who have proved their worth in having a sustainable business model in India, need to invest heavily in evolving processes for global operations if they want to profit from such opportunities. At present, most such enterprises have domestic orientation with 'small exports/imports window' which takes care of any emerging trade opportunities. The consideration of 'exports/imports' as a strategic option including well defined processes for 'acquiring vendor as well as customers' is almost lacking in most of the SMEs (especially for globalized models). Therefore considerations about running globally disbursed operations and having capabilities to deal with such issues might simply be out of question. This is even when most such units are plagued with high cost of funds (compared to their global peers) and global operations has a potential advantage that can help them bring down the cost of capital substantially. Getting hold of proven technologies, brands as well as 'mature & time-tested' processes are some of the other advantages.
Much of the institutional control on Capital still lies in the hands of Developed world entities although this is increasingly being challenged. These entities benefit out of 'trading' opportunities by turning the 'management controls' to those 'managements' who have stronger business case for ownership and well defined processes including evolved business models to raise enough credit to 'buy'. Indian businesses, who have proven their worth in 'global iron and steel sector' and have several other smaller but well documented successes as well, may want to benefit from such opportunities. As far as global bankers are concerned, they would certainly benefit if there is more competition for 'assets' that are on 'block'; or if more entities meet the borrowing risk threshold (provided they of course have transparent business procedures with mature business models); or if they can have more 'trades' including a role for their business models to enter emerging world markets with clients who can serve as important beachheads. It all puts a premium to globalized approach to business.
For this to happen, the smaller and mid-sized businesses will have to move from transaction oriented approach to partnership oriented approach with their customers as well as vendors so that they evolve a more sustained business model. They will need to invest in having more integrated financial reporting processes so that the values are cascaded seamlessly to investors in transparent manner. A supportive regulatory regime which puts a premium on transparency in 'reporting' will actually go a long way since this would bring greater trustworthiness on the 'numbers' and therefore improve credibility. Having proven competitive advantage will be a driving force that will help shape up meeting the global requirements to raise the game…