Emerging markets are the scene of the growth of major companies in sectors as diverse as telecoms, gas and oil, financial services and white goods. The Banker profiles six companies from around the world that are making their presence felt and, in some cases, taking on the established global giants.

Gerdau, Brazil

The Gerdau group may be more than 100 years old but the family-run speciality steel company is at the forefront of corporate social responsibility practices, even as it continues its aggressive international expansion – sales increased 58% last year to 11bn reals ($3.8bn).

It recently merged its operations in Canada and the US, forming a new company called Gerdau AmeriSteel Corporation, the second largest producer of long steel in the region with assets of $1.6bn. This allowed it to access the large US market efficiently and avoid the US government’s trade curbs on steel imports. In 2002, it exported record amounts of its long steel to Asia, while the resumption of demand in its Chilean operations helped to offset the lack of growth in its Uruguayan and Argentine units. In the past three years, its return on equity continued to rise, from 19% to 22%.

“The growth of the Gerdau group is based on values that have been part of our history for more than 100 years and on a vision focused on steel-making. We seek customer satisfaction, the personal and professional growth of everyone involved in our operations, total safety in the workplace, quality in all areas, a commitment to our stakeholders and profit as a measure of performance,’’ says president Jorge Gerdau Johannpeter.

Although the company foresees making further acquisitions, it faces the challenge of having a limited number of attractive opportunities in its sector. This may mean it expands into other areas.

“The future of the Gerdau group is tied to the trend towards consolidation in the steel sector throughout the world and especially in the Americas. We seek new investments that will add value while minimising financial risk to our shares,’’ said Mr Gerdau. “With our management experience, we are able to invest in companies that may have weak operations and convert them into efficient, lucrative organisations. Our strategy is simple: profitable growth that adds value for our shareholders.’’

Peter Matt, global head of metals at CSFB, says the company has an excellent position in the Americas. “The challenge will be to continue to find attractive growth opportunities in a consolidating market, in its core areas or in related products.”

Orascom Telecom, Egypt

Cairo-based Orascom Telecom (OT) has established itself as a nimble player in the GSM mobile and internet services markets in the Middle East and Africa and is fast expanding into high growth potential areas such as Pakistan and Algeria. At year-end 2002 the total number of subscribers reached 4.3 million, an increase across the group of 1.5 million subscribers (52% on an annual basis), which is healthy growth by international standards.

This growth came despite the divestiture of Orascom Telecom’s Jordanian subsidiary, Fastlink, and the six operations in OT’s African subsidiary, Telecel, based in Benin, Gabon, Burundi, Zambia, Uganda and Central African Republic.

OT’s chairman, Naguib Sawiris, told The Banker that 2002 was a turnaround year, when major restructuring efforts and divestitures took place to affect the bottom line, improve OT’s debt position and create long-term shareholder value. “The new strategy is to concentrate on countries with a high population, low mobile penetration and high business growth potential,” he says.

In 2002, the new subscribers in Pakistan subsidiary Mobilink grew by 535,342 (128%), in Egyptian subsidiary Mobinil by 422,000 (23%) and the new Algerian subsidiary, Djezzy, added 315,040 subscribers in less than a year. OT believes the large subscriber growth expected from Djezzy (which has 70% market share) in 2003, along with continued expansion in Egypt and in the new Tunisia subsidiary (OT won the second GSM licence in Tunisia for $454m in March 2002) will easily offset the loss of subscribers from the sale of Jordanian subsidiary Fastlink, an operation that had already become mature with a high subscriber penetration rate. Mr Sawiris says the Tunisia subsidiary has added 200,000 subscribers in the first four months of this year and that Pakistan, with a population of 140 million, offers tremendous potential.

On financials, pro forma revenues (excluding Fastlink and the six African operations) rose 45% to LE3506m ($583m) while consolidated EBITDA (earnings before interest, taxes, depreciation and amortisation) on a pro forma basis rose 57% to LE1384m. Net profit for the year was LE1047m. The sale of Fastlink last December for $423m was the largest divestiture in the mobile sector in the Europe, Middle East and Africa region last year. It enabled OT to reduce net debt by $475m by repaying around $300m and removing $175m from its consolidated balance sheet. OT now appears to be better geared and well placed in growth markets so it can face the future with considerable optimism.

MTN Group, South Africa

“An African solution to Africa’s problems” is a favourite catchphrase at MTN, the mobile telecommunications group that is steadily expanding its services across the continent. Launched in South Africa in 1994 and listed on the Johannesburg Stock Exchange, the MTN Group is now active in six African countries: Cameroon, Nigeria, Rwanda, Swaziland, Uganda and South Africa.

At the start of this year, the total number of MTN subscribers exceeded 6.6 million, reflecting a 17.7% rise over the previous quarter and a 39.5% increase since April 1, 2002, the start of that financial year. At the time of writing, MTN was in a closed period ahead of the release of its 2003 financial statements. Analysts expected to see a near doubling in headline earnings to about R2.3bn ($400m).

Huge opportunity beckons. In Nigeria, with a population of 124 million and a tele-density of less than two telephone lines per 100 people, MTN signed up one million subscribers in just over two years. Average revenue per user (ARPU) is just shy of $60. This is far more attractive than in MTN’s home market of South Africa, where the blended ARPU – reflecting the 81% proportion of less profitable pre-paid customers – is closer to $25. Unsurprisingly, EBITDA margins are running at a healthy 37% in Nigeria, well ahead of the 29% in South Africa.

What sets MTN apart? It has been more aggressive in its African expansion than its historical (and bigger) South African rival Vodacom. Earnings from outside South Africa now account for just less than a third of total earnings. MTN Uganda holds 65% of the entire telecommunications market there and 83% of the mobile market.

The group is also showing its skill at managing African risks and obstacles. In Nigeria it beat rivals to market by more than a year, leading analysts to predict it can secure up to 40% of the market there, estimated at 10 million subscribers in the next 10 years. In the absence of available and reliable terrestrial transmission links, MTN Nigeria built its own microwave backbone route to provide the necessary transmission infrastructure to support traffic flow routes in Nigeria.

A Deutsche Securities research note highlights MTN as offering some of the best growth prospects in the emerging Europe, Middle East and Africa region but also draws attention to the group’s currency sensitivity and debt position. Soft currency revenues against hard currency capital expenditure could be a worry. The group’s September 2002 interims highlighted a $246m unhedged position. Similarly, ongoing investment – R5bn announced already for the next two years – will have an impact on the balance sheet, although strong cash flows should more than meet this.

MTN Group chief executive officer Phutuma Nhleko says: “While the lack of existing infrastructure in Africa is often cited as a barrier to investment, it gives telecoms firms an opportunity to create new networks that boast the latest technology. The success of groups like MTN in Africa demonstrates strong consumer demand for reliable goods and services, where innovation is a key business strategy for providing Africa with products that are relevant and cutting-edge.”

YukosSibneft, Russia

It was Russia’s first mega-merger and, at the stroke of a pen, it created what will soon be the world’s biggest company in the world’s most lucrative business. In April, Russia’s biggest and fourth-biggest oil companies, Yukos and Sibneft, merged to form YukosSibneft. At a hastily called press conference, a visibly jubilant Yukos CEO Mikhail Khodorkovsky joined his Sibneft counterpart Eugene Shvidler to announce the deal and put an end to speculation about a possible tie-up. The two companies had tried to tie the knot before, on the eve of Russia’s spring 1998 financial crisis, but differences between the two managements scuppered the deal.

Russian oil companies are growing quickly and all the leading companies are keen to expand. But in the meantime they are concentrating their efforts in the Commonwealth of Independent States (CIS), where profit margins are high and there is little competition from the international super-majors. Last year, Yukos earned about $3bn of profits on revenues of $11bn.

“There is so much to do in Russia and Kazakhstan, we are not looking at going overseas at the moment. If the exploitation of Russian deposits is still returning 30%, why pursue overseas projects where the returns are closer to 7%?” says Hugo Erikssen, head of communications at Yukos.

The $15bn merger is the biggest in Russia’s decade-old corporate history. YukosSibneft has leapfrogged the likes of super-majors British BP, US ChevronTexaco and French TotalFinaElf into second place in the hydrocarbon universe in terms of reserves. With the production growth of both companies in double digits in the past four years, YukosSibneft is already one of the world’s fastest growing oil companies and is set to be number one in terms of production within a few years.

Russia’s vast oil reserves – estimated to be between 50 billion and 300 billion barrels – were only erratically exploited by the Soviet authorities. However, unlike most of the super-majors, the problem YukosSibneft faces is not finding more oil but getting it to market. Russia may be the second largest oil producer in the world after Saudi Arabia, but it is only a regional energy supplier because the transport infrastructure ends at the edge of the old Iron Curtain.

The ink on the merger contract was barely dry when the government gave the nod to two new pipelines in May, which will allow Russia to open the lucrative US markets and start pumping crude to the other darling of the emerging markets, China.

After initial reservations, the government gave the go-ahead as part of the state’s energy strategy to 2020. Yukos has already pioneered oil deliveries to the US by sending a super tanker there last year. But a new $3.4bn-$4.5bn Murmansk pipeline carrying up to 2.4 million barrels a day (due to be finished by 2005) will allow Russia to supply up to 15% of US demand.

Likewise, the Chinese are hoping to replace their dwindling domestic production with an initial throughput of 400,000 barrels of Russian oil a day through the pipe.

“Building a pipeline in Murmansk and China will make Russia a global player. Today China relies on oil from the Persian Gulf but, as Asian dependence on Arabian oil falls, Russia’s competitiveness will rise,” says Mr Erikssen. “And the Murmansk pipe is not just about sending oil to America. It will make exports of Russian oil to northern Europe more cost-efficient. Russia will become competitive with North Sea and Arab oil in all the markets from Europe to the Americas.”

With the way for a China pipe cleared, within weeks Yukos signed off on a massive $150bn Chinese oil supply contract over 25 years, one of the biggest such contracts ever.

Executives at Yukos argue that traditional business models are too cumbersome to capture properly the dynamism of the Russian oil sector. While the international oil majors have built up a huge bureaucracy to cope with their pan-global business empires, the Russian companies are earning huge revenues but their management teams remain small and concentrated, making them fleet of foot. “What took 100 years in the West takes us 10,” says Mr Khodorkovsky.

Haier, China

A “Made in China” label may mean cheap, low-quality or even pirated goods in many parts of the world. However, one Chinese company, Haier, is determined to change this image and is on the way to succeeding. After nearly two decades of hard work, Haier has evolved from a near-bankrupt manufacturer producing sub-standard washing machines to being the world’s fifth-largest producer of white goods. “Our near-term goal is to be the third largest,” says Wang Shiping, a Haier spokeswoman at the firm’s headquarters in the former port city of Qingdao in eastern China.

Haier has established the base for the next stage of ambitious expansion. It has a formidable manufacturing capacity that can produce 86 categories of electrical appliances with 13,000 specifications, Last year, it churned out 2.8 million refrigerators and 2.1 million air conditioners. It is now beginning to produce non-white goods, such as mobile phones, computers and pharmaceuticals.

Haier has an empire that reaches most corners of the world, thanks to strategic corporate alliances and more than a dozen overseas factories. Last year, the 30,000-staff company had a turnover of Rmb72.2bn ($8.7bn), generating profits of Rmb2.2bn.

Haier owes its success first to its president and CEO Zhang Ruimin who set the target (and succeeded) for the company to become China’s first multinational firm. Mr Zhang, a former bureaucrat in charge of overseeing state factories, has been called the Jack Welch of China and a Confucian capitalist for his success in innovation and motivating his workers. He organises each of his staff as a “strategic business unit”, instilling the idea that each should operate like an individual company accountable for its finances. He adopts well-tested ideas like the Japanese-style just-in-time system for procurement, delivery and logistics control, and he aggressively acquired rival producers nationwide as a way to beat the competition and to secure more market share quickly.

What distinguishes Haier most from other mainland corporate giants is its clear vision to be not only a powerhouse at home but to be a global force as well. As part of its worldwide strategy, it has forged alliances with overseas partners, such as Sanyo of Japan and Sampo of Taiwan, to sell each other’s products in different markets. It has also focused much of its energy on exports, with the aim of exporting two thirds of its production eventually.

Allen Ng, executive director of BOCI Research Limited, under the Bank of China group in Hong Kong, says it is too early to say if Haier could become as well-known as Sony or Samsung. “Haier is still a relatively young company and its edge is its cheap labour costs. It is doing well only in sectors that Sony and other multinationals have dropped out of in their pursuit for higher margins,” he says.

Reliance Industries, India

Reliance Industries (RIL) is India’s largest private business house with total revenues of Rs650bn ($13.9bn), net profit of more than Rs36bn and exports of Rs114bn. The group’s activities span petrochemicals, synthetic fibres, fibre intermediates, textiles, oil and gas, refining and marketing, power, telecom and infocom initiatives, financial services and insurance. Mukesh Ambani, chairman and managing director of RIL, says: “Despite the environment of continuous uncertainty, Reliance has posted a strong improvement in operating and financial performance. It is making a profound transition from a petrochemical company to a fully integrated global energy company with a significant services sector character.”

Reliance is particularly interesting for its growth capacity in the oil and gas sector, which is expected to transform the energy landscape in India. Most recently, RIL announced the discovery of gas in the deep-water Krishna-Godavari Basin off the Andhra Pradesh coast. “This was the world’s largest gas find of the year 2002. It was named Dhirubhai 1,” says Mr Ambani.

The estimated in-place gas volume in the eight Dhirubhai gas discoveries is 14,000bn cubic feet, equivalent to 2.3 billion barrels or 300 million tonnes of crude oil. The discoveries are capable of producing in excess of 60 million standard cubic metres of gas per day – a production rate at par with the entire gas sales of 65 million cubic metres per day from all other sources in India. At current market prices to the consumer, this means an incremental revenue of Rs100bn every year for RIL, equivalent to 15% of current revenues.

Jal Irani, oil and gas analyst at ICICI Securities in India, says: “With only 20% of the Krishna-Godavari Basin yet explored, this holds significant promise for the potential of Reliance to emerge as a global player.”

Concurrent with gas exploration and production in the Krishna-Godavari basin, Reliance will be building a gas transmission infrastructure, to take gas to industrial, commercial and household consumers by 2006. “Our vision is to be an integrated energy company with a world-class exploration and production organisation and assets,” says Mr Ambani.

Reliance’s leading position in India is reflected in its all-round contribution to the national economy. It contributes 3% of India GDP and accounted for 2.3% of the gross capital formation in the country in the past five years.

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