African Guarantee Fund is the first continent wide guarantee fund. World Finance speaks to its CEO, Felix Bikpo, about how AGF is working to support SMEs in a banking system which is geared towards big business.
World Finance: First, can you tell me how African Guarantee Fund differs from other guarantee funds in the continent? Felix Bikpo: African Guarantee Fund is the first continental guarantee fund. All the other used to be regional. We want to try to harmonise activity of the guarantee fund as much as we can, to have something that makes sense.
African Guarantee Fund is different also because it’s the first fund that was created based on the real need of the private sector, and SME sector. Most of them, they have created something for them, but they are not in line with their real need, and they are still struggling to get access to finance some things.
World Finance: Very interesting. How can you have a scalable impact across Africa? Felix Bikpo: I like this question. At the end of the day, the most important thing is to know is if what you are doing has a real impact on the SMEs, on the African economy.
[T]he most important thing is to know is if what you are doing has a real impact on the SMEs, on the African economy
We at AGF are trying to put in place what we call the monitoring and evaluation system, to measure at each PLI, each bank, each financial institution with which we partner, to see how many SMEs we helped, how many jobs have been created, how this has an impact on each country.
So in answer to your question, give me one year and I can get back to you and give you a better answer.
World Finance: Of course, at times there are conflicting interests between lenders and the SME sector. Tell me, how have your AGF products helped to address this concern? Felix Bikpo: I don’t like talking about conflicting interests. In fact, I don’t see that as a conflict of interest. It’s just a question of being able to address the issue.
The AGF products are tailored to address the major issue of access to finance for SME, to see if it is possible that the banking sector is able to give them the real financing that they need? Most of the time it is long term financing. The banking sector is ready to finance the short term, but don’t know how to finance the long term, because we don’t have enough long term resources.
So the product of AGF is trying to help this sector to transform the long term resources that we have in abundance to the long term to be able to address this issue.
World Finance: Now sovereigns of course play an important role in being able to access funds such as yours, do you think that sovereigns have done enough to increase this access for middle tier businesses? Felix Bikpo: A lot of things have been done, but unfortunately there is a long way to go still.
Today, if you look at all the regulatory environments that we’re having in the banking system, it’s more for big business, for big enterprise. So we need maybe to start thinking of how to create something that is more for the SME, and not giving too much constraint to the banking system and others, and be ok to finance them without taking too much risk.
We’re starting to have some discussion with some regulatory bodies in Africa. We are trying to pilot some think tanks, and we believe that shortly something will come out and we’ll be able to ease the regulatory environment, not in the sense that it’s becoming worse, but in that it’s more adapted to the SME sector.
By investing, creating value, we are creating jobs. By creating jobs we are creating wealth, and we can tackle the poverty issues that we are facing
World Finance: Now foreign direct investment inflows to sub-Saharan Africa have been growing in the recent past. Questions have been raised as to whether these inflows are powering the right type of economic model. How do you respond to the argument that most of the FDI is geared towards consumption, thereby neglecting production? Felix Bikpo: They are totally correct. Africa is growing because of all this FDI and we are happy for that. But this growth, fortunately or unfortunately, depending where you are – the agent is foreign business, and this is not creating production. We need to look at how, with these areas and the local resources also, we can invest and create value.
By investing, creating value, we are creating jobs. By creating jobs we are creating wealth, and we can tackle the poverty issues that we are facing. It’s our role as an African institution to help them say let’s direct these resources to the right sector, and for me the right sector is to create the production coming from the SME business, and this is where the future is.
World Finance: Finally Felix, what are some of the other key challenges that are unique to the SME sector in Africa? Felix Bikpo: Unfortunately there are so many others, but let me just put these three areas.
The first one is infrastructure. We can have financing, ok, but if these SMEs don’t have the appropriate infrastructure, nothing will happen. If there are no roads to take my product to other cities, nothing will happen. So infrastructure, all types of infrastructure, is a key obstacle for the emergence of SMEs.
Access to market is also another issue. And the legal and regulatory environment has to be improved seriously. A lot of African governments are working on that, and a lot has been done, and we also need to help them to do a lot more.
World Finance: Felix, thank you so much for joining us. Felix Bikpo: Thank you for the invitation.
An overview of each country’s national and international climate change policy. Lower rankings indicate stronger climate change policies
Portugal (Rank 6)
Still reeling from the economic crisis, Portugal has shown great pragmatism in desperate times. Using the disaster to its benefit, the country is looking for fresh approaches in order to bring its economy back from the brink. It has strengthened its climate policies, reduced fossil fuel dependency, and rather than squander profits from earlier investments made in renewable energy projects, it has reinvested into successful projects. There is still a long way to go, both in its efforts to make a mark on climate change and to fully emerge from its economic situation, but it fares better than Greece, which has completely abandoned its climate policies as a result of the Troika’s economic stranglehold.
Morocco (Rank 15)
The only non-EU nation to appear in the top 19 places on the list, Morocco performs strongly. Its overall score is helped by a good result in the renewable energy resource sub-index – to which, along with its North African neighbours, it has injected significant investment. Morocco has very low emissions and has the highest score for policy among the Arab states, with the government having implemented a wide range of projects (from a national action plan to prevent global warming to an ambitious solar plan). There are still areas for development, with transport a key issue, but overall the country fares well. It’s risen five places since last year and now sits in the ‘good’ category – a promising position.
Netherlands (Rank 31)
While several EU member states come near the top of the list and dominate the first 14 ranks, the Netherlands slips slightly behind, ranking in at 31st this year at the top end of the ‘poor’ rating – just behind Cyprus, Austria and India, and just ahead of Finland. It has nevertheless climbed up 18 places from 2013 as a result of improved policies, having risen up the ranks by 41 places the year before. But it fell back several ranks with regard to energy emissions, which suggests the country is continuing to feel the effects of its previous leaders. The new state policies should help lower those emissions as the country advances to become greener and cleaner.
Brazil (Rank 36)
BRIC countries have been reluctant to act on the issue of climate change, as in doing so, they are aware they risk having to forfeit economic prosperity. Brazilian President Dilma Rousseff shocked the international community when she refused to commit to slowing deforestation in the Amazon at the recent UN Climate Summit in New York City. This contentious decision by the South American leader will not serve her well within the international community, as combatting deforestation is crucial if there is any hope of making a dent in reducing emissions, with the Amazon producing more than 20 percent of the world’s oxygen. Brazil may also slip further down international standings.
United States (Rank 43)
The US continues to fare relatively badly, retaining its 2013 rank, which is only four places above the ‘very poor’ rating. The nation’s energy-related CO2 emissions have, however, seen a promising eight percent decrease over the past five years. It performs strongly with regard to policy, jumping 12 places this year following a tightening up of its environmental strategies. The state has been debating the use of environmentally damaging HFC gases after the release of the latest IPCC report, and is fighting to establish a global agreement as part of the United Nations Framework Convention on Climate Change (UNFCCC). It still has further to go if it’s to attain the higher scores seen within the EU and some parts of Asia.
China (Rank 45)
China’s CO2 emission levels remain the highest in the world. The country has, however, moved up the ranks to number 45 this year, indicating an overall improvement as CO2 emissions have slowed. It’s developing in terms of environmental awareness, having recently invested in renewable energy resources – although its performance in that field still rates as ‘poor’ due to a delayed impact. The State Council presented an air pollution project in September 2013 with the aim of cutting coal in four of the country’s major regions. These initiatives are promising steps in helping the world as a whole slash its environmental damage over the coming years, given China’s size and its dominance in global emission levels.
Australia (Rank 57)
With a change in government came the repeal of the carbon tax, losing Australia further ground in its efforts to effectively combat the effects of climate change. Now, lawmakers – in a bid to offset their poor track record on the controversial issue – are proposing implementing a cap-and-trade system, which will penalise companies that fail to meet emissions targets, while also opening up Australia to the international carbon market – valued at approximately $63bn. In the meantime, the world’s biggest emitter of carbon per capita is left in limbo, with no official climate policy to speak of. With staunch opposition coming from the Labour and Green parties, the country may fall further down the rankings.
In recent years, the Iranian economy has suffered tremendously as a result of conflict, corruption and sanctions. But with a nuclear deal on the horizon, the country’s fortunes may be about to change. World Finance speaks to Trita Parsi, President of the National Iranian American Council, about what we can expect for Iran’s economy.
World Finance: How does Iran’s economy stand today? Trita Parsi: The Iranian economy has suffered tremendously as a result of a combination of mismanagement, corruption and of course the sanctions that have been imposed by the United States and the west. There are a lot of structural problems in this economy, but in the last year and a half, in fact the bit before Rouhani became president, they were starting to see some shits. Some areas were starting to pick up. Inflation was coming down, unemployment is coming down, but the economy has a very, very long way to go, it’s nowhere near where it should be. Mindful of the tremendous potential Iran has, both in the sense of having a tremendous amount of natural resources and a highly educated and sophisticated public, it should be doing much, much better than it currently is.
[T]he economy has a very, very long way to go, it’s nowhere near where it should be
World Finance: Would you advise people to invest in Iran? Trita Parsi: If there is a deal, Iran is going to be an extremely attractive place for investment. In fact, there’s not going to be any market as large as the Iranian one that has opened up in the last 30 years. So there’s going to be quite a rush, there’s going to be a lot of business opportunities. Just to give a point of comparison, when Myanmar opened up after the sanctions there was quite a lot of excitement because it was a new market, not a huge one, but nevertheless it was the newest one that had opened up. Cell phone penetration in Myanmar stood at three percent, meaning for every hundred people in Myanmar there were three cell phones. Guess what the penetration is in Iran. It is 125 percent. For every four Iranians there are five cell phones. It is a very sophisticated market, yearning for the type of high tech goods that the west is very good at producing.
World Finance: Well Iran’s economy is largely centrally controlled. Do you believe this is a good way to run the economy? Trita Parsi: There is going to be a need for a lot of reform in that economy and a lot of different things to make it much more competitive. But it is an interesting economy, Iran is self sufficient in many different areas, so it is an economy that has, partly as a result of sanctions, managed to cope in spite of a lot of connectivity with the outside world.
World Finance: And how safe is the country to do business with? Trita Parsi: When it comes to safety in general in Iran, Iran is a very safe country. When it comes to making sure that the legal codes are such that investments are protected etc., there’s still some problems, but it is nevertheless going to be a very interesting and lucrative market, granted of course that sanctions are lifted and that they find an agreement on the nuclear front.
Forging a strong sense of loyalty between a brand and its customers is something all businesses desperately want but few actually achieve. Making a customer not just return, but also promote a brand out of simple goodwill, is the dream of all marketing managers.
While companies spend staggering amounts of money on various ways of engaging with their customers, there have recently been a few novel approaches to harnessing customer loyalty, while at the same time raising money for the business. The most prominent of these are so-called ‘mini-bonds’.
Mini-bonds are yet another form of crowd funding – a method of financing that has become increasingly popular in the age of social media. However, while other forms of crowd-sourced finance can involve equity within the business, or amount to little more than a donation, mini-bonds offer investors an annual cash return, alongside a number of other attractive perks.
An attractive model
Crowdcube is the UK company that has promoted the mini-bond platform, successfully raising money for firms including Chilango, Nuffield Health, John Lewis and Hotel Chocolat. The company says it now has 73,000 registered members, who it describes as a “ready-made investor audience”. In 2013 the Bank of England described it as one of a number of firms that could be ‘revolutionary’ in the financial sector. Crowdcube has received regulatory approval in the UK.
Mini-bonds are yet another form of crowd funding – a method of financing that has become increasingly popular in the age of social media
The idea has been to source crowd funding for companies looking to expand with a range of financing models including equity stakes. Crowdcube is proving attractive with investors because it allows them to lend money to both up and coming companies and established brands that they might be supportive of and feel an affinity with. Mini-bonds also offer a fixed-rate of income for investors, as well as a lower-cost form of financing for businesses. At a time when interest rates around the world are at record-breaking low levels, such a bond is attractive.
Chilango has drawn the most attention for its use of mini-bonds. Its offer of eight percent interest on its bonds and numerous additional benefits has given the Mexican restaurant chain a novel way of attracting investment and strengthening brand loyalty.
Firms are able to offer a plethora of perks to those customers who have invested. While they will undoubtedly get some form of fixed return for their bond, they will likely also get a number of additional benefits. In the case of Chilango, ‘Burrito Bond’ holders are able to enjoy two free burrito vouchers and an invitation to a VIP party. The minimum bond investment is just £500, but those loaning the company more than £10,000 will be able to enjoy free food at the restaurant for the duration of the bond period.
While some of these perks might seem trivial, they help to foster a sense of belonging to a brand that is hard to achieve through traditional marketing. Eric Partaker, joint founder and CEO of Chilango, said in a statement of his enthusiasm for the mini-bond platform offered by Crowdcube: “Our Burrito Bond is the perfect way for us to engage with our loyal following as well as Crowdcube’s investor base and accelerate our expansion plans with additional growth capital. As big fans of Mexican food, we love everything that is vibrant, fresh and fun, and Crowdcube is all of these. Its mini-bond platform is a breath of fresh air among the complexity and expense of existing solutions.”
Such has been the success of the Burrito Bond that, on closing the bond issue, Chilango had raised £2.16m: well over 80 percent more than the initial target. The money is expected to be pumped into expanding the business into more locations across London and the UK. While this has obviously been a welcome boost to the company’s coffers, it has also strengthened the link between brand and customer. Partakar told The Economist earlier this year that the move had helped create a strong link between the brand and its bondholders: “We now have hundreds of extra brand ambassadors. People want an emotional bond with the place they invest in.”
Over £40m
raised through Crowdcube
96,000+
Investors
71%
of investors have invested in tech businesses
Crowdcube’s co-founder Luke Lang has talked of how the new mini-bond model could go further in revolutionising fundraising for companies, while also encouraging brand loyalty from customers: “Just as we revolutionised equity investment, we are now turning the mini-bond market on its head by taking away the complexity and costs for businesses who want to raise growth capital and cut out the banks, at the same time as presenting a unique way to engage with their customers, encouraging loyalty from existing customers and attracting new people to their brand. For customers and investors, the opportunity to invest in companies they already know, and want to support, as well as receive a regular financial return on their investment, is appealing.”
Other firms that have looked at raising money through the mini-bond system include solar power company Belectric, which recently launched what it is calling the ‘Big60million’ initiative. Offering investors annual returns of seven percent before tax, the mini-bond requires a minimum investment of just £60 and is hoping to raise £4m.
Another example includes online shaving company King of Shaves, which in 2009 offered investors a three-year mini-bond that would return six percent annually, as well as an additional batch in 2012. Hotel Chocolat also offered a similar scheme in 2010, although instead of a financial return, bondholders received boxes of chocolates. Similarly, Naked Wines offered interest on its mini-bonds of either seven percent in cash or 10 percent in wine.
Serious concerns
While all this seems like a great new way of raising capital for firms, there are some that have sounded a word of caution over mini-bonds. Henry Talbot-Ponsonby, founder and managing partner of VCP Advisors, a London-based venture capital advisory firm, says that, while mini-bonds might prove attractive to small investors, they are not the sort of thing larger players would be interested in: “For larger raises of capital, firms typically want corporate finance advisors to hold their hand. The absence of advisors in smaller deals means that the market will be capped at ‘mini-bonds’, until platforms like Crowdcube become advisory firms, or are bought by them. But even then, once you start raising bigger amounts, you are targeting institutional investors like funds, who are more focused on the deal fundamentals than brand identity.”
Mini-bonds are less about making money for the bondholder and more about supporting a business they feel a particular affinity with
Talbot-Ponsonby adds mini-bonds are in fact extremely high-risk forms of investment, while at the same time offering little in the way of a return: “The bonds aren’t really bonds because they are so high-risk. In actual financial, non-retail investor circles, they would be called junk bonds, but that doesn’t inspire much brand confidence.”
Another concern over mini-bonds is their unregulated status. They are not tradable, nor are they listed, which means they do not come under the protection of the UK’s Financial Services Compensation Scheme. Investors’ cash cannot be withdrawn until the bond has matured, meaning that, if the company collapses during this time, the bondholder will lose their investment.
It is perhaps because of these risks and relatively low returns that mini-bonds are less about making money for the bondholder and more about supporting a business they feel a particular affinity with. While crowd-funding initiatives are predominately aimed at start-up businesses that are struggling to raise capital from traditional financial institutions, mini-bonds seem to be a more appropriate method for established firms with a certain level of brand-awareness and loyalty.
Mini-bonds seem to be a great idea for medium-sized businesses that already have a good level of customer loyalty and big plans to expand their operations. However, were those firms to take a wrong step and start to lose a lot of money, it’s unlikely many of their bondholders would be too thrilled to have invested their money in return for a paltry annual rate and a few additional perks.
Over the past two years, US authorities have not been shy about dishing out sizeable fines to banks and institutions found guilty of financial bad practice in the months and years leading to the meltdown of 2007. But, until now, none of the settlements imposed by American authorities has been as large as the one Bank of America has just been slapped with. Perhaps most surprisingly, despite the $16.7bn payoff relating to a civil suit, BoA might still face criminal charges.
The settlement is in reference to claims that BoA and its subsidiaries may have misled investors and manipulated them into purchasing toxic mortgage backed securities. The bank commented that it “relates primarily to conduct that occurred at Countrywide and Merrill Lynch,” before either institution was taken over by BoA. According to the terms of the agreement, the bank will have to pay over $9.65bn in cash, to be divided between the US Justice Department, the authorities of six states and governmental agencies including the Securities and Exchange Commission (SEC).
The remaining $7bn will be allocated to consumers who have run into difficulties in repaying bad mortgages and costs of demolishing derelict and abandoned properties. This makes it the single largest payment in US history, surpassing the previous record payoff by close to $4bn. On that occasion, JP Morgan Chase agreed to pay $13bn for similar offenses to those BoA has allegedly committed. Citigroup also faced a $7bn penalty when it chose to settle its case for similar charges last year.
Since the onset of the crisis in the US in 2007, commentators have suggested that big banks with a taste of toxic and risky assets were to blame for the near collapse of the American financial system
Since the onset of the crisis in the US in 2007, commentators have suggested that big banks with a taste of toxic and risky assets – and the subsequent fallout from this particular indulgence – were to blame for the near collapse of the American financial system. It has emerged that in the years leading up to collapse in 2007, banks like Merrill Lynch, JP Morgan and Citigroup had been repackaging residential mortgage loans into bundles that then formed controversial derivatives known as residential mortgage backed securities (RMBS). These were then sold off to investors, reducing the risk for mortgage lenders for defaulted payments, and offering a viable investment opportunity.
“In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together and sold them off in securities – even when the bank knew a substantial number of those loans were defective,” said US Attorney Paul Fishman, whose jurisdiction includes the state of New Jersey, one of the beneficiaries of the settlement.
Bad mortgages
On the surface, the system worked well and there was no cause for concern, though cracks appeared when it emerged that risky mortgages were being offered to borrowers regardless of their ability to repay those loans and with no appropriate checks or due diligence being carried out. As a result, the ensuing RMBS were backed essentially by toxic loans and were being sold off onto investors without meeting relevant underwriting guidelines and utterly inadequately collaterised.
“Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch and Countrywide sold billions of dollars of RMBS backed by toxic loans whose quality and level of risk they knowingly misrepresented to investors and the US government,” Attorney General Eric Holder said. BoA has been eager to stress that the investigations and subsequent settlement relate to claims that “relate primarily to conduct that occurred at Countrywide and Merrill Lynch” before it acquired in 2008.
However, though BoA has been vigorously penalised the actions of Merrill Lynch the practice of selling on RMBS was extremely profitable to banks, and therefore, widespread. Which probably explains why, over the years, standard of due diligence carried out by these institutions dropped – the derivatives became much more profitable than the original product.
Five of the largest corporate fines
$206bn
Big Tobacco
$17bn
Bank of America
$13bn
JP Morgan Chase
$4bn
BP
$3bn
GlaxoSmithKline
Prior to the settlement, three separate investigations were being carried out by different US states: North Carolina; California and New Jersey, over the same claims that Merrill Lynch knew that the quality of the assets in the RMBS it was selling was extremely poor, “based on its own due diligence, that substantial numbers of the loans it was packaging into RMBS and selling to investors failed to meet underwriting guidelines, did not comply with the applicable law, or were inadequately collateralised – all contrary to representations Merrill was making to investors,” according to a statement by the Justice Department.
In California especially, investigators have uncovered instances of quite severe failings. On one occasion, detailed by the Department of Justice, Countrywide actively concealed their use of ‘shadow guidelines’ from investors – these far from official guidelines allowed the bank to provide loans and mortgages to risky borrowers that would not have been otherwise permitted under the lender’s official underwriting guidelines. In the 30-page document that accompanied the settlement, it was made clear that BoA was aware that many of the loans bundled into the securities were subprime or downright junk. The fact that BoA chose to continue selling the RMBS despite being aware of their defects, is nothing short of problematic.
“It’s kind of like going to your neighbourhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you,” West told the press. These are extremely damning accusations. It means that Merrill Lynch was in full knowledge of the questionable legality of its operations for years, and vitally, at the time BoA made the move for acquisition. The 2008 period will probably go down in BoA history as one of the toughest ever; first it acquired Countrywide – the largest subprime mortgage lender in the US before 2007 – in February for over $4bn, only a month before the FBI announced its investigation into the lender for alleged fraud relating home loans and mortgages. Despite this setback, BoA moved into acquire loss-making Merrill Lynch in September of that year, in a $50bn all-share deal, announced around the same time Lehman Brothers confirmed its collapse.
Bad outcome
Both acquisitions have proved themselves problematic for the embattled BoA. US prosecutors have now announced they are preparing a civil lawsuit to be brought against Angelo Mozilo, co-founder of Countrywide – three years after prosecutors were forced to abandon a criminal probe on the former CEO. According to Bloomberg, prosecutors are now turning to the Financial Institutions Reform, Recovery and Enforcement Act to charge Mozilo and as many as 10 other Countrywide employees over allegations of fraud in the handling of its mortgage business.
The 2008 period will probably go down in BoA history as one of the toughest ever
“This morning we demonstrate once again that no institution is either too big or too powerful to escape appropriate enforcement action by the department of justice. At nearly $17bn, this resolution with Bank of America is the largest the department has ever reached with a single entity in American history,” associate attorney general Tony West said at a press conference in the wake of the announcement in August. Though West’s words might sound pompous and brash, the string of costly settlements and Mozilo’s potential indictment suggest that the current US administration is not done investigating and potentially persecuting financial institutions and notable players for perceived crimes against the system.
“We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future,” said Brian Moynihan, CEO at BoA, in a statement when the settlement was agreed. Indeed, the settlement certainly closes the door on ‘certain and potential’ civil claims by the states and agencies involved in the original suit – US Department of Justice, SEC and State Attorneys General from California, Delaware, Illinois, Kentucky, Maryland and New York – as well as all pending claims against BoA entities brought by the Federal Deposit Insurance Corporation. It does not rule out further criminal suits being brought or the filing of new civil claims against individuals.
“We have many tools in our tool box,” said West. Civil charges could be very effective because of the “lower burden of proof. That does not preclude us being able to use other tools in our tool box,” said West in regards to future action against the bank. This certainly must make the $17bn settlement even more unpalatable for BoA bosses and shareholders.
Quantitative easing is a tool enacted by central banks to increase money supply and avoid deflationary pressures.
In the last decade, QE was among a host of instruments used by the Bank of England, the Bank of Japan and the US Federal Reserve to initiate expansive fiscal policies in the face of sluggish economies in each country.
When applying QE, central banks purchase bonds from financial institutions: either commercial banks or other businesses, such as insurance companies. This increase in bank reserves is expected to encourage them to lend at lower rates to businesses. Second, having central banks buy bonds is expected to raise bond values, which will reduce long-term interest rates.
In the past, cash would be printed by central banks when QE programmes commenced. Today, these banks create the money electronically. So no bills are physically turned over. Rather, the intangible reserves are transferred by the central bank to buy various securities.
Japan was the first and most forceful among the three aforementioned countries to enact QE in 2001. Since 2012, the Bank of Japan has continued with its bold monetary easing programmes – part of the widely known Abenomics action plan.
In the US, the bursting of the real estate bubble set off intense monetary programmes in 2008. Successive programmes were to follow in 2010, 2011 and most recently in 2012.
The UK government also reacted with a monetary stimulus programme, which involved reducing the Bank of England base rate to 0.5% and the subsequent purchase of £200bn of assets, mostly UK government debt or ‘gilts’. Two more phases of purchases would come in 2011 and 2012, bringing the total assets purchased to £375bn.
Evaluating the success of each country’s policy reveals a mixed bag, especially with regard to the impact of QE on house prices, consumer confidence and exchange rates.
That being said, the general scholarly agreement that exists the positive impact QE policies surrounds the idea of the impact it’s had on industrial production in all these countries in the last decade.
Still, one can’t assume the impact ends at the borders of Japan, the UK and the US. The G4, the three aforementioned countries plus the European Union – have been criticised by emerging countries, such as China, India, Brazil and Russia, for the negative, destabilising impact their QE programmes have had on long term yields, equity prices, and exchange rates in these countries.
With the US, the UK and Japan speaking publicly about an eventual withdrawal from their current QE programmes, this move could potentially trigger a shock to the developing world.
Sri Lanka now has an economy of $67bn, which is expected to double by 2020. World Finance speaks to Piyadasa Kudabalage, Gamini Senarath and Vasantha Kumar from People’s Bank about how the banking sector is developing.
World Finance: Well Vasantha, if I might start with you, how developed is the banking industry in Sri Lanka and what challenges does it face? Vasantha Kumar: If we look at Sri Lanka’s GDP growth, it’s well above the global and regional average growth for the last five years. It indicates the banking sector’s contribution towards the economy. However, in our country the banking sector has grown faster than the economy. Ours is a transitional economy, debt-capital based country, but our developed capital market does not develop. However, our treasury bonds and treasury based market, we have a very vibrant market there. The banking sector has played a vital role in developing the capital market. In the development context, the banking sector has taken an active role there. In our country we are seeing a growing middle-income economy, so aspirations are changing, and we are seeing a faster growing ageing population, so the banking sector has to identify that and present innovations to meet the needs of the varied population.
World Finance: Gamini over to you now, and how is People’s Bank positioned in Sri Lanka, and how have you adapted to client needs? Gamini Senarath: There’s been at the forefront, taking banking from the cities to the villages for more than five decades, and currently we have a 13bn customer base, that is the largest in the country. Our customer retention rate is nearly 77 percent, it is very high. That itself shows that we continue to adapt to customer needs over the period of time. We have the largest saving base in the country, and we have the largest branch network in the country. We have more than 736 branches and over 420 ATM machines all over the island. We have one of the most expansive correspondent banking networks all over the world, over 150 corresponding branches, serving more than one million Sri Lankans who are living abroad.
We have the largest saving base in the country, and we have the largest branch network in the country
World Finance: So Piyadasa, one of the services that People’s Bank offers is development banking. What exactly is this and how does it aid the development of Sri Lanka? Piyadasa Kudabalage:Initially we extended our services to the micro-finance sector and we make them part and parcel of the banking sector environment. We made them freely accessible to the bank. The second stage, we developed the SME sector, we are that mass population in the country, it is involving medium level business enterprises. So yet again, we thought that with this current scenario that the country’s developing rapidly. Our growth rate is the highest in the region. Now we extend our financial facilities to the mega projects and the corporate sector.
World Finance: Well Vasantha, bank to you now, and how do you see the banking industry growing in the country? Vasantha Kumar: Over the past years, various challenges emerged in the industry across the globe, but Sri Lanka remained resilient. It continued its growth trajectory. Our regulators were also vigilant, resulting in continued growth and to weather any storms. Sri Lanka is surpassing 7500 per capita income by 2020. To the banking sector it has set up various targets. For example, to bring down the poverty below one percent, and the unemployment below three percent.
World Finance: Finally Piyadasa, what’s next for the People’s Bank? Piyadasa Kudabalage: The Sri Lankan banking sector getting consolidated to absorb more shocks coming and growing in the segment. We still believe that, while we extend our services to the corporate sector, we can develop micro-finance and the SME sector. That will be ultimately the backbone of the economy. We have not forgotten our original mandate where we had to make accessibility to the banking sector to the ordinary nationals of our country. So having that in mind, we extend our banking services to meet the needs of the day. We are developing our IT platform to be more efficient in times to come. We develop our key players in the bank to be more efficient in the financial environment. We do our best for the country by taking the responsibility to be part and parcel of the development drive.
Iran’s foreign minister will meet the European Union foreign policy chief and US Secretary of State John Kerry in the capital of Oman on the 9th and 10th of November, aiming to reach a nuclear deal. Will their efforts be successful? In part three of our four-part series on Iran, we talk to Trita Parsi, President of the National Iranian American Council, about what the likely outcome of the meeting will be.
World Finance: Well Trita, what is hoped to come out of these talks, and what’s the likely result? Trita Parsi: These are preparatory meetings for the final meeting that will take place in Vienna about a week before the deadline of November 24. The meetings in Oman are very key because those are bilateral meetings, just between the United States and Iran. They used to be secret, but they are now in the open. But they’re very critical, because at the end of the day this conflict is primarily an American Iranian conflict. Obviously other countries are a concern, they have stakes in this, but the root of the problem lies between the United States and Iran. The fact that the US and Iran are in a position now to be able to bilaterally talk to each other, that is essentially become normalised that they talk to each other, is a very significant step towards being able to resolve this conflict.
I think both the United States and Iran have shown unprecedented sincerity
World Finance: So how serious is Iran on reaching a nuclear deal? Trita Parsi:I think both the United States and Iran have shown unprecedented sincerity. Both sides clearly want to find a way to reach a deal. It doesn’t mean that they will accept any deal, it doesn’t mean that they’re not bargaining hard. In fact, both sides are bargaining very very hard right now, but it’s clear that this is very different from previous round and previous attempts at diplomacy, because the political will is at a level we’ve never seen before.
World Finance: And who will be the winners, and who will be the losers if a deal’s reached? Trita Parsi:I think essentially everyone will be a winner if there’s a deal. Some of the countries that will perceive this at least tactically as a loss may be the Netanyahu government in Israel, as well as the kingdom in Saudi Arabia, and this is for various reasons. The Israelis are concerned that the deal will leave Iran with a latent nuclear capability that will then unleash Iran from these sanctions and as a result Iran will be able to change the balance of power in the region, because it is a huge country with a tremendous amount of potential. It’s already ascending, and it would further ascend without the US trying to contain it. The Saudis are concerned, regardless of the details of the deal, that this will indicate a shift in the American tilt in the region, and that this will potentially jeopardise the commitment of the United States to the security of Saudi Arabia, and that by resolving tensions between the United States and Iran, the US will shift its position, it will no longer be in need of Israel and Saudi Arabia to the same extent that it is today.
After several years of turbulence within the global insurance industry, things finally begun to settle down during 2014. The financial crisis caused many of the world’s insurance markets to enter periods of turmoil, as uncertainty over the health of economies caused the industry to see a slowdown in activity. However, 2014’s relatively stable economic conditions have meant that the industry has seen an upturn in profit.
The last year has largely been dominated by plans to change the regulatory environment for insurance providers, mostly through new standards. Various regulatory bodies have been looking at how best to scrutinise a global industry that has been somewhat fractured in the past.
Last year saw two sets of regulatory changes that directly impacted upon the global insurance industry. The Financial Accounting Standards Board (FASB), the body dedicated to developing generally accepted accounting practices (GAAP) in the US, as well as the UK based International Accounting Standards Board (IASB), which is part of the IFRS Foundation, both set out proposals for changes to the way insurance contracts are drawn up and accounted for.
Regulatory reflection
According to accountancy firm PricewaterhouseCoopers (PwC), the new regulations will prove a costly imposition on the industry in the US, and that a global standard needs to be pursued. “In our view, the substantial costs of implementation outweigh incremental benefits of a US GAAP insurance contracts standard that is not converged with IFRS. In the absence of a single, high-quality global standard, we believe the US markets would be better served if the FASB made targeted enhancements to the current US model,” the company stated in a report titled Insurance Modernisation: Insurance Contracts Accounting Proposals.
Towards the end of last year, US insurance regulator the Federal Insurance Office (FIO) also released its report into how the regulatory environment can be modernised for insurance companies in the country. It too called for a more unified regulatory code across the US to help insurance providers avoid excessive costs, as well as allowing consumers a more consistent service.
The ongoing issue of internationally recognised standards for accountancy will continue to present new challenges to the global insurance industry. In the coming years, it is clear that the best way forward will be for both organisations to agree to a set of standards that allows for a level playing field around the world.
PwC adds that this continuing state of change means that insurance companies need to be as flexible as possible in order to avoid costly changes in the future. “In coming years, finance and actuarial functions will be dealing with an unprecedented amount of change that will frame the insurance reporting and solvency landscape for the next generation. These requirements will come into effect at different times, and uncertainty remains about their final form. Accordingly, companies need to develop thoughtful, proactive implementation strategies in order to avoid rework and changes that could ultimately lead to excessive costs and under delivery on original targets.”
Shaun Crawford, Global Insurance Leader at analysts Ernst and Young (EY), wrote in the company’s annual review of the industry that while the industry had emerged from its recent difficulties, it should not expect any drastically improved profits in the immediate future. However, he did point out that there were some areas of growth that presented the industry with opportunity. “Although it remains premature to unequivocally state that the difficult times are behind the industry, many signs point to significant pockets of opportunity. In Asia-Pacific, for example, rising wealth and ageing populations are enticing areas of product expansion and revenue growth.”
He added that the low interest rate environment across the world will continue to present challenges to the industry, and questions just how long the rates will last beyond this year. “Nevertheless, complex challenges lay ahead, chief among them the protractedly low interest rate environment. The question in 2014 is not how low rates may go, but how low they may remain. Another lingering challenge is the often-confounding array of stringent international and national regulations spawned by the financial crisis. Obviously, these enhanced regulations create significant compliance and governance burdens for insurers. Adding to these burdens is the implementation timing of many laws, which remains uncertain.”
Around the world
Although economies in Asia-Pacific experienced a slowdown in growth, as well as the historically low interest rates seen all over the world, many people within the region have enjoyed a rise in their personal wealth. Combined with an ageing population, this has given many insurance providers a number of opportunities for new products.
China’s insurance market has experienced strong growth, according to ratings agency Fitch. Life insurance sales were not constrained by tighter regulations, which included a rule set out in April that ensured low risk and long-duration products would account for at least 20 percent of total premium sales.
However, in Australia the life insurance industry has been severely criticised by the Australian Securities and Investments Commission (ASIC) for its failure to comply with rules on how customers are advised. According to a study of 200 advice files in September, the ASIC found that as much as one third of advisors were breaking the rules. Peter Kell, Deputy ASIC Commissioner, told reporters that such a large failure by the industry was “unacceptable”, adding “the life insurance industry is now on notice to lift standards and professionalism”.
With European economies still suffering from the shock of the eurozone crisis, markets across the continent have enjoyed little more than a period of comparative stability this year. This has, however, led to many insurance firms to address the way in which they do business and to streamline their operations.
Europe’s dramatically low interest rates have meant many firms are not seeing the sort of profits that they had grown accustomed to before the crisis. As a result, these firms have to look at their existing business models, streamlining and simplifying operations. EY has stated: “As insurers watch investment returns dwindle from the impact of low interest rates, they will adjust portfolios and seek to increase yield without taking on significant added risk, most noticeably by seeking new diversification effects.”
As the economy in Europe improves, however, it is likely to cause a rise in both motor and home sales. This will in turn lead to household and car insurance sectors seeing a boost in trade, although this will also likely be quite modest initially.
In the UK, Governor of the Bank of England Mark Carney warned the industry that the BoE would start vetting top officials as part of its fit and proper persons test. This came after some criticism of the industry for mispricing products.
Perhaps one of the regions that offer the industry the most in the way of potential, Latin America is still susceptible to above average catastrophe exposure and volatile inflation. However, the region appears ripe for many insurance providers that are willing to offer out of the ordinary forms of cover, according to EY’s report.
Latin America’s insurance industry is seen as highly competitive, even though the overall market has experienced low penetration rates. For example, life insurance is notoriously low, despite rising prosperity across the continent.
Global trends
There have been a number of issues that have affected the industry on a global level. One area that has seen a lot of focus is the insurance industry’s digital presence. Many within the industry have called for greater investment in digital platforms, such as social media, that will help firms to better connect with customers and also allow consumers to share their service experiences.
According to EY, insurance providers do not spend much more than 10 percent of their IT budgets on digital initiatives, although this was largely expected to increase considerably over the course of the next year. Enhancing social media engagement is seen as a beneficial way of connecting with customers, especially in light of regulatory changes reducing the number of distributors.
At the same time, the uncertainty that has been caused by numerous geopolitical events – from Ukraine to the Middle East – has meant that political risk insurance has soared during the last 12 months. According to the World Bank’s political risk department, many insurers are looking to get in on the political risk market as a result of the surge in activity. Foreign direct investment growth in emerging markets is seen as one reason for this jump in performance, but it also reflects continued turmoil in many parts of the world.
A year of readjustment has put the insurance industry in a better position than it has been in for a long time. However, challenges lie ahead in 2015, and those providers that are going to be successful will need to get the best out of what opportunities there are.
World Finance recognises those companies that have adapted to survive and are currently leading the way, setting the pace heading into the new year.
In the weeks and months preceding the release of Boeing’s 787, the much-talked-about aircraft was cast as a major breakthrough for the aviation industry and a master class in supply chain management. However, to bring the Dreamliner to runways as quickly and competitively as possible, manufacturing was shared between a patchwork of suppliers: wing tips were made in Korea, landing gears in the UK, cargo access doors in Sweden, movable trailing edges in Australia, and so on.
So when in 2013 a Japanese-made lithium-ion battery set alight and brought Heathrow Airport to a standstill, critics were quick to highlight cracks in Boeing’s knotty network of suppliers and the broader issues associated with global supply chain management.
Likewise, when in June The Guardian unearthed the existence of slavery at the tail end of Walmart, Costco and Tesco supply chains, the implicated parties admitted that they were unaware of what was promptly dubbed the ‘supermarket slave trail’. Forced to work without pay and under threat of violence, the investigation cast a spotlight on untold measures of brutality, inflicted in the name of competitiveness, and again showed what knowledge, or lack thereof, companies had of their suppliers’ dealings.
Renouncing responsibility
The circumstances here offer a glimpse of what consequences an increasingly globalised supply chain can bring, and highlights just how much work is to be done before they are seen as legitimately responsible. If companies are to protect against financial, environmental and social collapse, they must take a more pro-active approach and employ greater risk management protocols to avert the pitfalls of an increasingly globalised supply chain.
“Modern supply chains have an extensive global footprint and this exposes them to differentiated economic, environmental and socio-political challenges,” says Aditya Sharma, Operational Director for Global Sustainable Supply Chain Services in Accenture Strategy. “Uncertain direction of regulations, regional macro-economic trends, changing political landscapes and varying focus on social development mean supply chains face disruption from diverse physical, regulatory and other sustainability risks.”
The business of supply chain management become an art unto itself
The nature of today’s global marketplace demands that corporations look to operations apart from their own to make certain cost savings and quality improvements. Globalisation has not only allowed businesses to capitalise on otherwise unreachable resources and expertise, but extend their influence to consumers beyond their own borders. And where once companies communicated with their suppliers face-to-face and worked out any issues in the here and now, customer-supplier relations have since stretched the length and breadth of the globe, and the business of supply chain management become an art unto itself.
According to a PwC report entitled Next-generation supply chains: Efficient fast and tailored, 45 percent of a 500 party sample – made up of supply chain experts – identified the supply chain as a strategic asset for their respective companies. And in a marketplace where strategic advantages are increasingly hard to come by and globalised operations subject to ever-evolving macroeconomic pressures, supply chains constitute a vital means of differentiation for businesses. Adaptability, therefore, is arguably the single most important quality for companies looking to wrap their heads around modern day supply chains and better understand what risks and rewards are contained within.
“Companies are now looking at sustainability not as a ‘good to have’ but as a way of doing business – supported by a very sound business case with tangible economic benefits – 80 percent of the 1000 CEOs interviewed for the UNGC-Accenture survey in 2013 view sustainability as a route to competitive advantage in their industry,” says Sharma.
Bangladesh garment industry monthly minimum wage (2013 figures). Source: Research Initiative For Social Equity Society.
Don’t ask, don’t tell
In amid the clamour for global competitiveness, some firms are choosing – willingly or not – to sacrifice ethics and quality of service in favour of cost savings. Research undertaken earlier this year for the British government’s Modern Slavery Bill found that 11 percent of firms believed it possible that slavery had occurred at some point in their supply chains. Speaking on the findings, David Noble, Group CEO of the Chartered Institute of Purchasing and Supply (CIPS) said “Consumers and business leaders have entered into a “don’t ask, don’t tell” pact on Britain’s supply chains.”
The cost pressures of working in a global marketplace, coupled with the emergence of the so-called ‘conscious consumer’, means that companies can ill-afford to take an eye off their supply chains for fear of the financial, social and environmental repercussions it could bring. While outsourcing can bring greater competitiveness to those who employ it to good effect, without taking into account how it might affect others, the immediate advantages will be outweighed by the repercussions in the long-term.
The pressure on companies to act as equal part profit-making machine and responsible corporate citizen has brought with it a focus on sustainable supply chain management, asking that they take into account the ramifications of any one single step in the supply chain. “Companies are increasingly extending their commitment to responsible business practices to their supply chains not only because of the inherent social and environmental risks and the governance challenges the supply chain poses, but also because many of the rewards supply chain sustainability can deliver,” says Ursula Wynhoven, General Counsel, Chief, Governance and Social Sustainability at the UN Global Compact. “Sustainable supply chain management can be a strong driver of value and success – for business as much as for society, with an enormous potential to contribute to more inclusive markets and advance sustainable development.”
Some firms are choosing – willingly or not – to sacrifice ethics and quality of service in favour of cost savings
Still accounting costs
The Rana Plaza factory disaster, for example, was part responsible for triggering a wave of socially responsible supply chain programmes, and its influence can still be seen more than a year and a half on (see Fig. 2). The collapse of the eight-story commercial building last year killed over 1,100 textile workers and was seen as a lesson in how inadequate supply chain management can bring with it gross financial and human costs.
Primark and Benetton were mainly implicated in the scandal, who were criticised for failing to uphold proper working conditions and address known structural weaknesses. And while the losses on all counts were devastating, news of the event succeeded in igniting discussions on the importance of corporate social responsibility in supply chain management and the role of companies in protecting against incidents of this sort.
In the months that followed, the garment industry, governments, trade unions and NGO representatives banded together to form the Rana Plaza Coordination Committee, with the support of the International Labour organisation (ILO). The ambition of ‘the arrangement’ was to help victims of the tragedy by providing much-needed financial and medical support, and while the initiative is far from a solution in itself, the participation of corporate names signals a willingness to make amends for any wrongdoing committed on their part.
What’s more important for socially responsible supply chains, however, is that companies, particularly post-Rana Plaza, are willing to carry out supplier audits to protect against sub-standard working conditions. Acutely aware of what failure on the part of any supplier can bring, companies are keen to implement the necessary tools to sniff out risks and protect against financial and reputational losses. And by creating a framework to expose risks before they become unmanageable, businesses can more easily build a resilient and responsible supply chain.
Unilever, for example, has been voted the best supply chain in Europe by Gartner for two years running for “demonstrating supply chain excellence and leadership year over year.” An Oxfam study of labour issues in Unilever’s operations and supply chains likewise concluded “Unilever is committed to respecting and promoting human rights and good labour practices.”
The company pledged at its annual “Partner to Win Supplier Summit’ in September to look beyond its 200 biggest suppliers and to the one million plus individuals working on the lowest rungs of its supply chain. Building on its Responsible Sourcing Policy, “an illustration of Unilever’s commitment to increase its positive social impact throughout the entire supply chain,” the company, together with Solidaridad, is looking to bring the programme to underserved regions of Africa, Latin America and Asia.
Source: Solidaridad, 2014 figures
The partnership with Solidaridad, an NGO that specialises in bringing sustainable best practices to supply chains, has already improved the lives of over 150,000 workers in India, Mexico and Colombia, and stands as a prime example of responsible supply chain intervention. “Together with Unilever we will engage suppliers and support them to address current and future business challenges,” said Nico Roozen, Executive Director of Solidaridad Network in a statement. “Suppliers need access to resources and to markets. We need to change market conditions to shift sustainable production from niche to norm.”
Similarly, HP has taken major steps to build a sustainable supply chain, beginning with the foundation of its Supply Chain Responsibility (SCR) programme in 2001. The scheme is also closely in keeping with the company’s Living Progress ethos, through which it aims to deliver human, economic and environmental progress and make a measurable impact on society (see Fig. 3 and Fig. 4).
With a presence in more than 45 countries and territories spanning six continents, HP’s complex operations go far beyond its own walls and come to bear on hundreds of thousands of people across the globe. Since 2007, efforts to improve sustainability have reached 460,000 workers, and a number of peer educator-run programmes have benefitted an even greater number of individuals. HP last year also became the first IT company to introduce guidelines for the responsible management of student and dispatch workers, and in 2007 was the first electronics company to publish a list of suppliers.
The examples of Unilever and HP are proof that companies are beginning to take a more pro-active approach when introducing benefits to the furthest reaches of their organisation and in pushing for greater sustainability in supply chains. Although a number of companies are looking to their suppliers for instances of gender inequality, inadequate pay and worker rights violations, the most pronounced development is the implementation of environmental best practices.
Environmental awareness
“Customers are increasingly aware of the environmental and social impacts of hazardous products or product ingredients and are known to pay premium prices for green products in many markets,” says Sharma. “In the latest CDP survey analysis for 2013-14, 56 percent of companies identifying climate change related opportunities say that consumers are becoming more receptive to low-carbon products and services.”
11 percent of firms believed it possible that slavery had occurred at some point in their supply chains
Optimising logistics networks for environmental purposes – otherwise referred to as greening the supply chain – has grown increasingly common, due largely to pressure from consumers to make clear how companies are working towards mitigating climate change. Beginning with matters as simple as reducing the use of plastic goods, recycling paper and even turning light switches off at closing times, businesses are today implementing all manner of complex environmental initiatives to appease consumers.
“The more corporations around the globe focus on sustainability, the more they realise that their greatest challenges and opportunities often lie outside their own offices and manufacturing plants,” according to a Wharton University of Pennsylvania report, entitled Greening the Supply Chain: Best Practices and Future Trends. “To make a truly significant lifecycle leap, large companies have to work on greening their supply chains.”
Aside from the immediate advantages, namely reputational gains and greater operational efficiency, the process of greening supply chains also brings with it a number of long-term benefits. Those committed to reducing their carbon footprint invariably find that sustainability comes hand-in-hand with fewer marginal pressures, improved supplier relations and, ultimately, material gains. And although the demands of implementing an environmentally responsible supply chain can be huge, the rewards are equal to the exertions.
For example, major American food manufacturer Kelloggs announced recently that it would impose carbon disclosure requirements on its suppliers in order to curb emissions. “We expect suppliers to support our corporate responsibility commitments by implementing sustainable operating and farming practices, and agricultural production systems,” wrote a company statement. “Suppliers must strive to reduce or optimise agricultural inputs; reduce greenhouse gas emissions, energy and water use; and minimise water pollution and waste, including food waste and landfill usage.”
Notes: total, cumulative
The company has introduced the policy with a view to publishing a total supply chain greenhouse gas emissions reduction target and an accompanying action plan. By including the environmental contributions of suppliers – no matter how small – alongside its own, Kelloggs’ contribution to mitigating climate change can be more accurately charted.
Acutely aware of what wayward emissions could bring for global food production, the company’s climate policy is critical not just for the continued success of the business, but the viability of the industry as a whole. Knowing this to be the case, a number of programmes have emerged in recent months and years to combat what losses could come as a result of shrinking food production.
Making a difference
The Behind the Brands initiative, pioneered by Oxfam, has seen numerous companies pledge to do right by their suppliers and commit to pushing social and environmental causes. With Coca-Cola, PepsiCo, General Mills and Nestle on board, the initiative allocates a score to each company, based on their contributions to areas such as women, workers, climate and transparency.
Tools like the Dow Jones Sustainability Index, GRI, CDP and the UN Global Compact’s 10 principles are also playing a key part in educating companies about how best to improve their supply chains. Focusing on matters such as human rights, labour, the environment and anti-corruption, the 10 principles outline a framework for those looking to eliminate any supply chain shortcomings they may have. “We see more and more companies extending their commitment to responsible and sustainable business practice throughout their supply chains,” says Wynhoven.
“Companies are starting to understand that their most significant impacts on the environment and society occur in their supply chains, and they are increasingly working together with their peers and other key stakeholders to improve their impact and to identify opportunities to promote human rights, improve labour conditions, protect the environment and support ethical business conduct.”
The biggest challenge for companies with a globalised supply chain, however, is not recognising and publishing corresponding environmental and social initiatives, but ensuring that these policies are enacted. An increasing number of companies are attuned to what issues have arisen, though the demands – financial or otherwise – associated with delivering on change can often prove too much to bear, as can be seen in the UN Global Compact’s 10 principles.
The examples of Kelloggs, HP and Unilever, therefore, are of the utmost importance if others are to gain an understanding of how pro-active supply chain management makes good business sense. For as long as competitors fail to deliver on the promise of progressive supply chain management, they will struggle to realise what benefits a holistic approach to corporate social responsibility will bring for their reputation and bottom line.
Surrounded by Bolivia to the northwest, Brazil to the east and northeast, and Argentina to the south and southwest, the Paraguay of the 21st century – a landlocked nation of 6.8 million inhabitants – has been shaped by more than 200 years of tense relationships with its neighbours.
Twice the country faced obliteration and twice it had to reinvent its future as an independent nation that today is 90 percent dependent on the combined river systems of the Rio Pilcomayo, Rio Parana and Rio Paraguay, which all converge to form the Rio Plata, near the Atlantic Ocean between Uruguay and Argentina.
Paraguay remains a mystery to most of the outside world, even to its neighbours. Surrounded by myths and legends, it would be unfair to summarise this country to the historic fame of its border city Ciudad del Este; the tri-border city, at the crossroads of Brazil, Argentina and Paraguay, is no longer the centre of contraband and illegal trade that characterised it in previous decades when Brazil and Argentina banned importation of Western goods.
Rather, it is a country the size of Germany or California, with a young and connected population: the average age is 23 and mobile penetration is nearing 100 percent. The UN rates Paraguay as the least violent country in all Latin America; and with 84 percent of the population under 60 and a 94 percent literacy rate, it has a number of important building blocks for a great success story.
A country still in its infancy
Paraguay became independent in 1811. Until 1989, the country only experienced glimpses of democracy. Even after the fall of General Stroessner in 1989, another general became president, until the election in 1993 of the first civilian president, Juan Carlos Wasmosy. This means that Paraguay, as a true practicing democratic country, is just 21-years-old. Most of the public institutions are still trying to find their role and assert their authority in the midst of a major lack of general infrastructure (Paraguay’s only real crisis).
Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates
In spite of its relatively traumatic history, Paraguay is a country that functions, albeit not efficiently, and has managed to experience tremendous growth over the past 10 years on the back of the revolution of its agricultural sector. Recent growth has averaged five to six percent since 2002.
Although democracy has been in effect for the past 20 years, Paraguay experienced only one term with a president who did not come from the historic ‘Colorado’ party. President Lugo, elected in 2008 to everybody’s surprise (including his own), was the manifestation of a coalition of leftist parties that in the end did not manage to implement the changes that were required to modernise Paraguay.
President Lugo’s term ended in June 2012, with his impeachment for bad management of the State’s affairs. Not a single shot was fired and in the evening his Vice-President, Federico Franco, was sworn in for nine months, until the next presidential elections of April 2013.
This impeachment would have dramatic consequences for the country. It upset carefully laid plans for the extension of the Bolivarian ideology across South America and happened at a time when Paraguay was being forced to allow the Venezuela of Hugo Chavez to enter the Mercosur alliance, already integrated by Dilma Rousseff’s Brazil, Cristina’s Kirchner’s Argentina and Jose Mujica’s Uruguay, all partisans of the Bolivarian revolution.
The impeachment gave a ‘reason’ to the Mercosur alliance to exclude Paraguay from its political process, thus allowing Venezuela to join the alliance by the back door. Paraguay also got suspended, although for a shorter period, from the Organisation of American States.
S&P Credit ratings:
BB+
Paraguay
BBB-
Brazil
SD
Argentina
Source: Standard & Poor’s
Notes: 2014 ratings
The election in April 2013 of Horacio Cartes as the new president of the country allowed for new hopes. As a successful businessman, a majority hoped that he could translate his successes in the private sector to the public sector government institutions. After swearing in during August 2013, the country quickly reintegrated into Mercosur, and had to accept the fact that Venezuela was now a part of it, and embarked on a number of reforms critical for the future development of the country.
Challenges of governing Paraguay
Paraguay’s credit rating (see right side-bar) is the perfect example of what such ratings really mean. A country that only experienced three years of budget deficits out of the past 13 years, a GDP growing at an average five to six percent per year over the past 10 years (see Fig. 1), a foreign debt-to-GDP ratio of some 10 percent that becomes negative when considering the foreign reserves, and with a relatively solid financial system that presents few systemic risks. The country is currently set at BB+ by Standard & Poor’s, the same as Greece in 2010 just before it went into virtual bankruptcy.
Paraguay’s current rating reflects the number of friends it would have coming to help in case of economy turmoil, which is very few. As such, expectations are vague and disappointment is constant for the 6.8 million inhabitants who find it hard to exist between the two giants, Argentina and Brazil. In this context, President Cartes has put the country into intensive care, voting a fiscal responsibility law within two months of his legislature to prevent excessive public spending.
A public private partnership law was voted to provide the legal bases for the major infrastructure projects this government expects to tender. He also dealt with each of the ministries on a re-institutionalisation quest, naming for the most part, non-politics in the key posts. Most ministers have had to re-build their ministries to organise the way they function and report, and how they spend. The project was expected to last a few months, yet is still ongoing more than a year later.
However long this reorganisation of the public sector may last, it is a necessity as it lays the foundation for long-term growth that would no longer be entirely dependent upon climate conditions and international demand for soy and meat. It also helps to provide a different vision on what the government should do and how it should behave, two notions that are still relatively new in this country. Both the public sector and the citizens are on a fast track learning curve.
Source: CIA World Factbook. Notes: 2012 figures
A massive reservoir for growth
Ironically, for a country that has not engaged in any significant infrastructure projects over the past 30 years, it is home to the largest dam in the world in terms of electricity production, surpassing the Three-Gorges dam in China. Sitting on the border, and shared 50/50 with Brazil, the Itaipu Dam generated more than 98Twh of electricity in 2013 (83Twh for the Three-Gorges). However, considering its size and needs, Paraguay only uses some 10 percent of its 50 percent share in that production and exports the rest to its partner.
The same goes for the Yacyreta Dam, sitting on the border of Argentina and Paraguay. Today the country is one of the world’s largest exporters of electricity (see Fig. 2). Considering that another five areas have been identified as viable dam projects within the country itself, clean energy production is not going to be an issue for the foreseeable future. Equally important for the coming years, Paraguay sits on the second largest reservoir of fresh water in the world, the Guarani aquifer, providing a reliable source of fresh water for responsible farming.
Paraguay’s agriculture has the capacity to triple its food production output, having more than eight million hectares still available for mechanised agriculture. However, more efforts need to be put in land rehabilitation and implementation of the current environmental laws to prevent more deforestation. Paraguayan agricultural successes can easily be measured. In just under 10 years, it managed to become the first exporter of organic sugar, the second largest exporter of stevia, the fourth largest exporter of soy, the fourth largest exporter of starch, the fifth largest exporter of chia, the sixth largest exporter of corn, the eighth largest beef exporter and the 10th largest exporter of wheat.
In addition to its agriculture potential, the country has not tapped its underground wealth that, if we consider its geographical location between Bolivia, Brazil and Argentina, is likely to be composed of significant mineral and energy resources. As a production centre, Paraguay is getting more and more attractive to countries facing growing production costs and higher taxes. A number of companies are expressing interests in relocating part of their operations in Paraguay under some of the very attractive tax regimes offered to foreign investors. Electrical parts manufacturing companies for the auto industry, for example, have already installed production facilities in the country to serve the Brazilian market. Other industries should follow.
The geographical location of the country, which can be a challenge for the movement of goods (see Fig. 3) in and out of the country, is also a blessing. In the heart of South America, it is a natural hub between all its neighbours and beyond. It doesn’t suffer from natural disasters such as tornadoes, hurricanes or earthquakes, and its topography makes it a country with massive swath of land ready to use for production.
Source: US Census Bureau. Notes: Figures taken in January of that year
Not just another emerging market
Human nature likes to classify and order everything, including countries. Because of this, it was decided that Brazil, Russia, India and China had certain similarities and therefore should be grouped from an economic analysis standpoint known as BRICs. We therefore institutionalised more than 2.9 billion people that have very little in common. Everybody that is not an OECD country or part of the BRICs is deemed an emerging market.
With this concept of amalgamation, Paraguay is being analysed in the same way as Madagascar, Surinam or Bangladesh. The story is however radically different. Apart from its demographic, which is characteristic of a young developing country with over 60 percent of its population below the age of 35 (see Fig.4), Paraguay’s growth story differs in many aspects from other emerging nations.
It has been a very conservative country when it comes to macroeconomics over the past 12 years. It has managed to achieve an average growth rate of five percent over that period with only two years of budget deficits. These were due to election pressure, and not structural economical issues. All the while the country has been growing its foreign reserves more than 10-fold to over $7bn today. Overall, total public debt remains at a low 15 percent of GDP and when considering only public external debt, that number drops to below 10 percent, making the country a net creditor as foreign reserves account for more than 20 percent of GDP.
In other words, Paraguay has grown substantially over the past decade almost entirely thanks to its private sector initiative. That differs substantially from other emerging stories that have relied heavily on foreign and public funding, and welfare driven consumer demand. The public sector has been helpful in facilitating this growth, primarily in reducing the tax burden on companies, providing solid regulation for the financial sector and facilitating the development of private ports, which are the main point of transit for goods in the country.
The country now has the third-largest fleet of river barges in the world, after the US and China. However, successive governments have been much less efficient in developing their own investment programmes, almost abandoning plans to improve existing and develop new roads, airports, railways, and other transport links, while limiting critical investments needed in healthcare and education. The current government team is trying to catch up but the task ahead is enormous, as it needs to train its own staff before it can start tendering projects to national and international groups for large infrastructure projects.
Paraguay’s agriculture has the capacity to triple its food production output, having more than eight million hectares still available for mechanised agriculture
Growth to-date has not been sourced through the government’s funding or subsidies, but mainly through the development of the private financial sector. Bank assets grew six-fold in the past 12 years, thanks to the solidity of the Central Bank of Paraguay and its Superintendence for Banks. Strong regulation has allowed the sector to attract interest from multilateral institutions as well as various development banks from the US and Europe that have helped by providing long-term funding to the local financial institutions at a time when domestic deposits would not average more than 12 months. Change in the funding profile of the financial sector has been promised through pension fund reform.
Key aspects of the banking regulation have been centred on provisions and minimum capital requirements. Paraguay is ahead of Europe in its implementation of Basel III rules, especially in terms of solvency ratios. Local regulation has already established a minimum of 12 percent for total solvency and eight percent for Core Tier I capital.
Considering the fact there are no capital market activities, trading and other forms of volatile investment banking activities, the systemic risks of the financial sector are very limited. Today, total financial assets only represent approximately 30 percent of GDP, which remains low when compared to other developing countries, for example over 95 percent in Brazil or over 65 percent in Colombia.
Paraguay has the most stable currency in Latin America and has the second highest return-on-investment for the private sector in Latin America. It has the lowest tax burden in the region. Therefore, the country benefits from strong macro-economic numbers, a financial sector that is well regulated and has funded growth to-date, and financial assets that account for a relatively low percentage of GDP. But the main potential resides in the origin of the growth and what latent growth remains to be tapped.
Having benefited from sustained demand in agriculture products – mainly soy, but also corn, wheat, sesame and meat – put another way, the growth has not been fuelled by demand from developed countries for raw materials used in construction (iron ore), minerals used for consumer goods (copper, gold, lithium, rare earths) or oil, but from demand for feeding a growing number of people living on the planet. This is also very different from other emerging economies and is not about to change any time soon. Paraguay is slowly but surely setting itself as a key provider of food for the world, through higher production volume and higher quality standards.
Finally, the country benefited from being the largest exporter of clean, renewable energy, setting energy prices at half the price of its neighbours for industrial clients. As Paraguay only uses about 10 percent of what it produces, its capacity to provide competitively priced electricity in the future remains very strong. Its ability to increase the volume and the quality of agro-industrial production with the nascent, but fast growing, industrialisation of the country, provides Paraguay with a strong growth outlook over the next few decades.
Source: CIA World Factbook. Notes: 2013 figure
Intelligent business practices
Paraguay remains an interesting story for investors that need to look beyond the obvious problems of the country. Red tape, and to a certain extent, administrative blockades of all kinds, can be at times frustrating, but doing business in Paraguay remains relatively easy when compared to other countries in the region. Being so small, business intelligence is easy to gather and a number of professional associations exist to facilitate the integration of newcomers, allowing them to establish themselves in Paraguay.
The key challenge for the country will be to invent the second phase of its growth story outside of the obvious development of its agro-industrial sectors. Paraguay has the capacity to become a key producer in certain heavy industries, and it can also become a regional energy player. But providing education standards are raised, it can substantially develop its services and consumer sectors.
An immediate next step objective for the country is connectivity, to connect itself to the regional network of roads, railways and airports. This lies at the heart of the current strategy of the public sector. In addition to fiscal responsibility reform, legislation has been introduced for private sector participation in this infrastructure build-out. Combine this with the pre-existing fiscal incentives (the so called Law 60/90) such as zero percent tax on capital goods (machinery and equipment), no VAT on capital goods purchased locally or abroad, no taxes on remittance abroad of capital or interest, and a 10 year holiday of dividend and profit repatriation for new projects, and you have a potent cocktail for stimulating private sector investment.
In short, Paraguay has attractive geography, a great energy balance, good demographics, strong fiscal and monetary stability, and has embarked on an outreach programme to build multimodal logistics and seek new international corridors to market. There is no ideological agenda short of a desire to raise domestic standard of living. The speed at which this can be implemented will dictate the speed at which the economy can grow
in future decades.
The World Cup of football may be over for another four years, but there’s one global sporting battle that never stops – the eternal war between Nike and Adidas for the hearts, minds and pockets of sports fans and consumers worldwide.
It’s a contest fought across many sports besides football, and the protagonists are engaged across several venues at once: in laboratories, on television, online, in sponsorship deals, via quirky marketing campaigns, on the high-street and on every playing field on the planet, from local parks to the Camp Nou.
Between them the two leading brands command a value of more than $25bn. Over the years they have carved up their own territories – Nike in the Americas and Adidas in Europe and Asia. But that’s now changing as the two giant brands go head to head in a pitched battle for world domination. And, increasingly, the brands are clashing on the same turf.
Turf war
In 2006, Adidas engineered a coup that would have once been unthinkable, by securing an 11-year merchandising partnership with the National Basketball Association (NBA) in the US. In 2010, it wrote a big enough cheque to win an eight-year extension of Major League Soccer (MLS). At that time Adidas’ subsidiary Reebok had its name on all the apparel of the National Football League (NFL). Rubbing salt in the wound, Adidas is also official sponsor of the Boston marathon, one of the world’s best-known running events.
Suddenly, Nike wasn’t just looking over its shoulder at an emerging competitor in its home market – it was left in its dust and trying to catch up. It has, however, been fighting back. In 2012 it wrestled back the NFL rights from Reebok and is working on getting back into other so-called ‘hard sports’. And it is highly unlikely to give up its long-term support of such historic connections as the Penn Relays, a sentimental event for intercollegiate sports that takes the brand back to its athletic roots (founders Phil Knight, currently Chairman, and track coach Bill Bowerman started making shoes because the Japanese brands at the time did not meet their requirements).
Even their marketing pitches summarise the nature of this all-out competition. ‘Impossible is nothing,’ trumpets Adidas. ‘Just do it,’ insists Nike
Wherever there’s growth in the sporting goods market, Nike and Adidas are there slugging it out. Nike sponsors basketball in Greece, Spain, Israel, Poland, Russia and Brazil (to name a few). It supports cricket in India, baseball in South Korea and rugby in Argentina. As for Adidas, it sponsors archery in Pakistan, artistic gymnastics in the US and Italy, baseball in China, and boxing in Thailand. Indeed there’s hardly a country or a sport where the brands are not present in some form. Even their marketing pitches summarise the nature of this all-out competition. ‘Impossible is nothing,’ trumpets Adidas. ‘Just do it,’ insists Nike.
Clash of the titans
The captains of these respective teams come from very different backgrounds. At Adidas, 50 year-old CEO Herbert Hainer is the son of a butcher who opened his first business, a pub, while still a student in business school. His main sport was football. His counterpart at Nike, Mark Parker, is a political scientist who ran track for Penn State. A company veteran, he worked his way up from the job of shoe design in the R&D department. He still likes to work on shoes and was in fact jointly responsible for the company’s first ‘green shoe’, an environmentally sustainable product. Parker is also much better paid than his rival CEO – last year total compensation came to nearly $15.5m compared with Hainer’s €2.7m [$3.5m].
There are no major opportunities in the sporting goods market that Adidas and Nike, famously identified respectively by their three-stripes and swoosh logos, have neglected. Including its Reebok, TaylorMade golf and Rockport shoe brands, Adidas covers just about all sports from football and basketball to athletics, tennis and golf with many others besides. Under the umbrella of Nike, the Greek goddess of victory, are also brands such as Jordan, Umbro, Converse and Hurley, among others.
Nonetheless, football is the main battleground. Before the victorious German team had even boarded their plane home from the Fifa World Cup this summer, sports-marketing analysts were already figuring out which brand was the real winner of the tournament. Their collective conclusion is that while Nike outfitted more teams, 10 to Adidas’ nine, the German brand came out on top because its home team won the trophy. And, no doubt to Nike’s distress, the German brand also sponsored Argentina in an all-Adidas final.
Ever since founder Adi Dassler started making football boots, the ‘beautiful game’ – and the World Cup in particular – has been the historic powerhouse of the German company’s revenues and it has put aside a large war chest so that it can stay on top. Adidas is the official sponsor of the World Cup and has succeeded in extending its contract with Fifa for the next 15 years, right through to 2030. Although the price is high, at an average $70m for every World Cup between now and then, it’s a price Adidas is willing to pay.
At first appearances such a long contract should hand all the spoils from the World Cup to Adidas. In fact, excluded as it is from Fifa’s murky corridors of power by its rival’s close relationship with the top echelon in the sport’s controlling body, Nike has opted for a different route into football – that of guerrilla marketing. Nike employs digital and other alternative channels that enable the brand to go straight to the ordinary fan, essentially bypassing officialdom.
Nike has, for instance, developed an app that helps footballers to join pick-up games in the local neighbourhood. If they want a game, they just click the app and wait for a response. In Latin America, a region of street football, this kind of marketing will go a long way.
Sources: Nike, Adidas, Forbes, Twitter, Facebook. Notes: Sales and profit taken from Adidas Q2 and Nike Q4
Paying for the shirt
Nike is also aiming to spoil its rival’s party in Europe where it traditionally dominates. The Oregon-based company now sponsors the kits of more of the leading clubs in the ‘big five’ – Germany’s Bundesliga, Spain’s La Liga, France’s Ligue 1, Italy’s Seria A and, the biggest prize of all, the English Premier League – than any other brand.
But, as the BBC reports, an alarmed Adidas has pulled out the chequebook. In a bet on the return to form of Manchester United, the German brand has signed a record-breaking £750m, 10-year deal with the club to begin next season. The current sponsor? Nike. And Adidas will, from next year, have its name on the kit of Italian champions Juventus for a more modest £112m (€140m).
In European football the stakes are astronomical – in the 2013 season the fans of the big five leagues bought 13 million shirts. “The brand awareness of football is like no other,” explains Professor Chris Brady, Director of the Centre for Sports Business at the UK’s Salford University.
In football it pays to buy up the most-televised, highest-ranking teams. As Andrew Walsh, the football analyst at Repucom, a worldwide sports marketing research group, told the BBC: “In terms of revenue it is the top 10 European teams that dominate, delivering 65 per cent of total shirt sales. Most of these come from clubs in the English Premier League, Adidas’ strongest market.”
As Walsh adds, while Nike has signed up more clubs, Adidas still owns the bulk of the shirt market. And that’s what counts. As David Beckham’s management team will vouch, the transfer fees for top-line players are often calculated on the amount of kit they sell as well as on their footballing ability.
Nike and Adidas don’t have it all to themselves, in football or any other sport. German rival Puma sponsored eight teams at the World Cup while Italian Lotto and Spanish Joma were able to enter the fray. In the English Premier League, the financially astute Arsenal has signed with Puma.
The biggest global brands after Nike and Adidas are also-rans. Ranked by customer preference rather than sales, they are Puma, Asics, Under Armour, North Face, Umbro, Fila and Vans – but they’re a long way back. Puma, for instance, rattled up sales of €2.99bn last year, impressive but a long way behind Adidas’ €14.5bn.
In individual sports it’s easier for rival brands to make raids into the Nike/Adidas domination because the price is not as high. In something of a shock to both brands and an all-Asian final for the sporting goods industry, the men’s winner of the 2014 US Open tennis was Croatian Marin Cilic, who was showcasing Chinese brand Li-Ning, a 25 year-old company founded in Beijing. Cilic had switched from Fila in 2011. Meanwhile, runner-up Kei Nishikori was dressed by Uniqlo, a Japanese casual wear company.
Adidas is the official sponsor of the World Cup and has succeeded in extending its contract with Fifa through to 2030 – the price an average $70m for every World Cup until then
Research and retail
As consumers reveal a willingness to spend more on higher-end products, both brands are changing their distribution and retail strategies to hike their margins. This is most obviously reflected in a marked trend to wholly owned and branded stores as well as to supporting the more up-market retailers. “Nike and Adidas see the benefit of creating their own retail environments so they can tie the in-store experience closer to what they’re doing elsewhere in their marketing,” says Magdalena Kondej, Head of Apparel and Footwear at Euromonitor International.
It’s all about taking the consumer on a “structured journey” that employs all forms of marketing including social media to, hopefully, produce a sale. As Scott McLean, co-founder of Intelligent Marketing Institute, puts it: “People will judge the battle between Nike and Adidas by how much chatter they generate. But the real war will be waged around how they take the audience on a structured journey that leads them to a Footlocker store or a website to make a transaction.”
Ultimately though, sales are based on the quality of the product and that, in turn, is based on relentless R&D that produces heavily trademarked and fiercely protected technology. For instance, Adidas golf shoes come with ClimaProof waterproofing, Fitfoam interiors and Traxion cleats. Meanwhile, Nike’s footwear is equipped with Zoom Air, Power Platform and the Q-Lok spike system with Scorpion Stinger spikes. Nike’s sponsorship of Tiger Woods and Rory McIlroy is designed to persuade weekend golfers to trade up to the highest-margin brands such as Tiger Woods’ signature shoe, the Air Tour TW, at around $275 a pair.
Oddly enough, although Nike pays heavily to have its name on the clothing of Woods and McIlroy, it generates only three per cent of total revenues from the sport, or about a quarter of what Adidas books from golf. But that’s a double-edged sword for Adidas. When the TaylorMade golf brand runs into trouble – as it did last year, especially in the US, because of an excess of stock – it hit the German brand disproportionately hard.
Because Adidas started in football, it’s jealous of the technological superiority Nike claims in the sport – and so its laboratories’ current focus is on lightness. Coming on sale in 2015, following years of development, will be the 99g [3.5oz] football boot. For comparison, when founder Adi Dassler produced the water-resistant ‘Argentina’ boot over 50 years ago, it weighted 355g – and that was considered a breakthrough.
The brand awareness of football is like no other – Professor Chris Brady
Indeed, the brand is making a virtue of shedding weight – soon footballers will be able to run onto the pitch in a 630g kit, all up. That’s boots, shirt, shorts, socks and shin guards. Such is Adidas’ commitment to lightweight attire that the gear of all of its sponsored teams in Brazil was exactly half the weight of that in the previous World Cup in South Africa.
But does lightness matter? Both brands are convinced it does and produce copious evidence to prove it. If, for example, a marathoner runs to complete exhaustion and finishes in three hours, calculations show he will have covered the distance precisely 1 minute and 48 seconds sooner provided he wears a shoe that is 100g lighter than an alternative model. For an elite athlete that is clearly a free gain worth having.
Similarly in football, a 100g lighter shoe not only means the player will be able to do 10 more sprints per game, there would also be a 20cm advantage over an opponent for every 10m dash for the ball.
The only stat that matters
In the financial battle Nike is definitely on top. In July Adidas was roasted by analysts for posting net income for the second quarter of €144m, below an earlier €150m estimate, on sales of €3.47bn. It followed Adidas’ third profit warning in a year. The main culprit was falling sales in North America (down 4.3 per cent), Asia excepting China (down five per cent) and Eastern Europe, including the important market of Russia (down 1.3 per cent). Institutional investors aren’t happy. “Execution remains a serious issue for this management team,” argues John Guy, an analyst at Berenberg Bank, in a client note.
Chief executive Hainer, who has been in the hot seat since 2001, was apologetic but plans to fight back. “We left our brands exposed to attack in some markets, which has cost us market share,” he told shareholders. “It’s obvious we have to go back to the training ground. We clearly want to improve our brand leadership.”
His immediate response is to lift the marketing spend from 13 to 14 per cent and, in a reversal of the retail strategy, to slow down the roll-out of new stores while closing the loss-making ones. “As we gear up for our next five-year strategic plan, we will assert ourselves much more aggressively in the marketplace,” Hainer promised.
Adidas’ biggest challenge is to raise the value of the brand, say sports marketers. The Interbrand consultancy puts a worth of $7.5bn on Adidas, less than half that of Nike’s $17bn. The American company’s domination is explained by highly effective, more underground style of selling. “Nike is the cheeky challenger doing guerrilla-like ambush marketing,” explains Repucom’s Andrew Walsh. “Adidas follows the more orthodox line.”
As an example, it was galling for Adidas that it spent an estimated $100m on the World Cup while many fans thought Nike was in fact the official sponsor. “Nike managed to get the benefits without as large an upfront investment,” points out Leah Donlan, marketing lecturer at Manchester Business School.
And that’s almost like winning the World Cup with nine men.
Wealth management used to be reserved for the elite, and to an extent it still is, except that definition has broadened slightly. Wealth management firms once set the bar out of the reach of many investors, with one of the prerequisites for entering into the market being an abundance of accumulated wealth – needing a lot of money to make money – but times have changed.
The rise of innovative exchange-traded funds to mitigate rising costs, as a result of increased regulation, along with more and more investors opting to manage their own portfolios, has led a number of wealth management firms to widen their nets. Many still recommend a minimum investment fund of around $100,000, but that figure has opened up the market to small-business owners and even families looking to better manage their asset portfolios.
Finding steady footing
Since the 2008 financial crisis, the stock market has managed to find more solid ground, with a noticeable rise in overall volatility and volumes. Similarly, a level of stability has steadily returned to a number of national economies, as GDP growth figures begin to see a slow but steady recovery out of the global recession.
Wealth and asset managers have faced their fair share of difficulties at the hands of the financial crash too. Asset prices fell considerably as a result of the economic downturn, which also made a considerable dent in investment funds’ overall revenues, with some of the biggest wealth management firms in the industry coming close to collapse. But the sector has shown considerable resilience, especially when it has been hit by a string of stringent global regulations in the form of Dodd-Frank in the US and MiFID II in Europe – with more likely to follow. Regulation is responsible for raising costs, as well as altering the lay of the wealth management landscape, changing the habits of investors and, therefore, altering the manner in which wealth managers must interact with their clients.
Digitisation is pervasive in all industry sectors and one that can be a difficult to keep ahead of, but if used properly it can help firms offer alternative service models and better cater to the needs of their clients. Wealth management, an industry that takes pride in cultivating strong, personal relationships, is facing both challenges and new opportunities, as technology shapes the sector and, more specifically, how clients want to interact with their wealth managers.
There will always be demand for face-to-face interaction between clients and those tasked with looking after their investment portfolios. But the growth and success of mobile applications, video, and social media platforms, due to their increased speed and accessibility, means they are becoming the preferred method for high net worth individuals (HNWIs) to stay informed, as well as in executing certain transactions.
The digital movement has taken a little longer to reach the wealth management sector, which is not that surprising considering the age of many HNWI, who may lack the technological literacy or interest of their younger counterparts. But the digital trend is likely to continue, as a younger set of investors begin joining the ranks of the world’s financial elite. Therefore, the application of digital technologies is essential if firms want to survive. They must be willing to adopt, evolve and grow their use of these platforms and incorporate these systems into the very heart of how they do business if they hope to cater to their new, technologically savvy client base.
“Technology plays a critical role in the industry’s future,” says Ian Smith, financial services strategy partner at KPMG in the UK. “The clients of the future will be fundamentally different in terms of their needs and expectations. They will demand more personalised information, education and advice that will require asset managers to radically address their technology capabilities to really understand their clients and support this level of service.”
Increased regulation
The Governor of the Bank of England, Mark Carney, announced regulators’ intentions to clamp down further on investment funds, and that watchdogs around the world will be keeping a close eye on the sector, in a bid to prevent a repeat of the financial crisis. He told attendees at the IMF and World Bank annual meetings, held in Washington DC, that, while he is happy to see the sector grow, with assets managed by investment funds equating to nearly 90 percent of the global economy, the need for stricter regulation is essential.
“[There must be] a focus, as there has been with banks, on the systemic risk it could create,” said Carney. “In the current environment, those types of activities need careful monitoring, and possibly a deliberate policy response.” In all sectors of the financial industry there is a drive by regulators, as a consequence of heightened social and political pressure, as well as for the sake of market stability, to apply stricter rules in areas of capital, liquidity, derivatives, corporate governance, compliance and transparency. The cost of updating internal systems and practices in order to comply with these new regulations costs the industry, and in this case wealth management firms, a lot of money to implement. European firms have felt the pang of increased red tape the most, with the region seeing overall costs of doing business inflated between five to 10 percent since the financial crisis.
The overall wealth management market, however, continues to grow. According the World Wealth Report 2014, HNWI growth continues to accelerate. Improved economic and equity market performance has added 1.76 million people to the global HNWI population, with the investable wealth of HNWIs growing by nearly 14 percent to reach a record high of $56.62trn.
The report also forecasts global HNWIs’ overall financial wealth will continue its upward trend, predicting growth figures of 6.9 percent annually through to 2016, which translates as a record high of $64.3trn. It expects every region, except for Latin America, to grow strongly, but that the Asia-Pacific region is likely to emerge as a clear leader, with a 9.8 percent annual growth rate.
Large retail banks have had to look closely at their wealth management divisions, weighing up whether it is still a viable option for them to be involved in particular markets. Some banks think it wise to downsize and decrease their exposure, preferring to narrow their focus and simplify their overall strategy. But, as is the case in financial markets, where there is space, there is always someone else eager to fill it.
Some large US banks have chosen to pull out of the European wealth management market altogether in order to escape cost-escalating EU regulation, favouring to focus solely on their domestic market. This has opened the doors for smaller, independent firms to swoop in and gobble up good talent and with it new clients. This will allow them to increase their market share, while the bigger players rethink their positions in the marketplace.
Wealth managers are in a state of flux; a combination of regulatory pressure on one side, and short-term margin pressure on the other is causing firms big and small to start looking at the core aspects of their business models. Though global wealth has managed to pick itself up to something like pre-crisis levels, there is still a lot of work to be done if wealth managers are going to see larger revenues.
There will also need to be an overhaul of their methods. Wealth managers need to continually provide clients with high-quality advice, and they will also need greater technological solutions to enhance their business offerings. Success in these areas will give firms – particularly, in this instance, small, independent firms – a means of differentiating themselves from the competition.
