It's time to refuel

The thing to bear in mind when considering emerging markets, says Franck Baron at AXA Corporate Solutions, is that the risks are not the foremost in companies’ minds. No doubt terrorist attacks in Russia and India, the recent bribery case in China or social unrest of South Africa will have been attracting managers’ attention in the past month or so; but it’s not why companies are looking to those countries.

“Primarily, it’s an opportunity,” notes Baron, the company’s business development manager for risk consulting, a former risk manager for Firmenich and Danone, and former board member on both Amrae and Ferma. “They are looking to those markets because they believe that is where a significant part of their growth is going to come from in future.”

And it’s a belief that will have been reinforced by the experience of many emerging markets over the crisis. AXA Corporate Solutions’ head of global risk management Ergu Genya says that you only have to look to China to see the attraction. “We observed at the time of the crisis that it only lasted a couple of months,” he says. “They simply asked workers to go home for a few weeks and wait to be recalled. Within three months everybody was back at the factory.

“That certainly wasn’t the case in the US and Europe.”

This is partly what’s driving AXA Corporate Solutions and competitors to these markets. Like other continental insurers with good shares of the home markets, it’s looking to the emerging markets to “refuel its growth”. On the underwriting side, it is now in China, Singapore and Dubai, and is looking to Mexico and later South America and Brazil; on the risk consulting side through AXA Matrix Risk Consultants it has operations in China, India, Singapore, and the end of the year an exclusive agreement will convert to see the launch of AXA Matrix Risk Consultants Mexico.

“We are in strategic areas,” says Genya.

The challenge it faces in these markets is much the same as that faced by its clients: to ensure it has the ability to take account of and adapt to the local “specificities”, as Baron calls them, such as the culture and market habits.

“It’s about allocating the appropriate resources to ensure that companies are established there in an efficient way and ensure that they can seize the business opportunities those markets present.”

Of course, in many cases, the prime opportunity overseas businesses see in the emerging markets remains cost cutting. That will change with time as the countries develop, and as Baron points out, we have already been seeing companies move production from China to Malaysia or from Hungary to Romania, for example, as costs rise. If you’re looking to these markets as “low-cost countries”, he remarks, you need to remember that you are looking at only a snapshot of the situation.

“Nevertheless,” he says, “today China is the supplier of the world, but it is not yet the market of the world.”

However, that some companies are looking to the BRICS and elsewhere for lower costs, rather than increased sales, doesn’t alter the risks. In fact, it just means more companies are exposed.

As Baron puts it: “The biggest operational risk faced by companies today is the complexity of their supply chains due to the development of outsourcing, offshoring, subcontracting or other remote sourcing.” The result is that business disruption can originate from a remote corner of the globe and have a dramatic impact on a company’s production and brand.

“It is no longer just about the major activities or facilities in Europe or the US; a small niche suppliers thousands of miles away in China can be critical to the total sustainability and continuity of the company,” says Baron. “That’s why today one of the most frequently used words with my clients is ‘resilience’; how to improve your ability to be resilient in spite of the fact that your supply chain pattern is growing increasingly complex.

“The fact is that transferring activities through offshoring or outsourcing does not mean that you are transferring the risk.”

A values-based approach

Perhaps the most obvious example for Baron of this is in ethical issues. When he was a vice president of Ferma some years ago, he was keen to highlight the role of corporate risk managers in promoting corporate ethics. As he put it then, the industry needed to get “from value-oriented risk management to values-oriented risk management”. As companies increasingly get involved in emerging markets, that need has grown.

“One of the paradoxes faced by corporations today,” he explains, “is the fact that at the same time as they are increasing communication about their values, social responsibility and sustainability, their supply chains are seeing them source parts or activities in remote countries where the standards are not always the same.” Those sourcing decisions are primarily going to be assessed by their financial impact, but if the brand risk is to be offset, it needs to be tempered by other considerations.

“It does not mean you have to stop sourcing and development in those countries, but you do have to deal with the issues,” says Baron. “The role of a risk manager is to ensure that the values are integrated into the equation”.

In fact, he sees it going even further: rather than just managing the risk, he suggests, companies have the financial means to invest in local development. “If you have a strong corporate social responsibility or policy in your company, concrete initiatives in developing countries can help improve the image or public perception of the behaviour of international corporations.” he explains. “I see it more as an opportunity than a risk.”

How well companies are integrating this or other aspects of risk management in the remote locations they have activities in is not always clear, however. It’s not just the big names that have been caught out in the past for child labour or environmental abuses (another increasingly important issue, says Genya); a survey by Ernst and Young a couple of years ago found developed-country parent companies concerned about the standards of communication on risk from their emerging market subsidiaries.

To some extent that concern remains well founded. “What could be done better,” says Genya, “is bringing the objectives and skill sets over in such a way that the regional people really buy into the project.” Too often, language barriers, cultural barriers and remote locations prevent this from happening. “We need to be better at adapting the processes and objectives, explaining them, and convincing people about their value.”

A large part of the answer to this is likely to come locally in the insurance sector. It doesn’t hurt, for instance, that firms can increasingly draw on international consultants with bases in the emerging markets. Starting with the brokers, and then the insurers, there is a trend, says AXA Corporate Solutions’ chief P&C underwriting officer Philippe Jouvelot, towards ever more local servicing. Many of the brokers operating in China, for instance, have traditionally been based in Hong Kong. Starting again today, they would rather be in Shanghai or Singapore, he says.

“In the past customers operating in the emerging markets were satisfied just to get the capacity. Now they also want to also have the servicing and you can’t provide that through international brokers in London,” as he puts it.

It is, of course, more cost efficient for clients to provide servicing locally, but the primary benefit is the local knowledge this brings. Activities in emerging markets mean companies are integrating much more complexity and instability into a company’s risk map, says Jouvelot, and it takes local experience to provide proper insight into these. “It is not something you can understand just by reading the headlines of your newspaper,” he argues.

To put it another way, it is one thing to know the difficulties involved in setting up a business in India. It’s another thing to have done it, as Genya did, and to encounter first hand the bureaucracy involved. It is a country, he says, with huge potential – great assets and incredible intellectual capital – but also huge challenges. Setting up AXA Matrix Risk Consulting in China took three or four months. In India, it took more than a year.

“It is not an easy place to do business,” he recalls.

Locals insight

The other benefit, though, comes from the increasing domestic market AXA and others are finding in developing countries. As Jouvelot explains, there have been two waves to risk managers’ and insurers’ expansion into the developing world: The first accompanying their existing customers. (“Our clients are global, and we must be too,” he says.) The second wave, though, is the domestic business in those countries, which is an increasing part. The most striking example, again, is in China.

“In China, they want to be best in class,” explains Jouvelot. “They don’t intend to be left by the process of globalisation as the low-cost manufacturing base of Western companies. They want to be first in everything.” That extends to risk management.

“Chinese managers aren’t just looking to meet adequate standards; they want to lead best practice, and they’re prepared to pay to get advice on the best risk management they can have.”

Genya agrees. The remarkable thing about China is the speed of development, he says. In the larger companies, education levels are high, they make decisions quickly, and they look for the best. It’s a massive country, of course, and there are still many aspects that are below standard. “On the management side, though, China is moving fast.”

It is true that standards vary greatly across the emerging markets, and China is not typical of them all. However, if you look to India and much of South East Asia, Brazil and Central America, or much of the Middle East, it’s the pace of adoption by local companies that’s different, not the direction of travel for the most part. And as expertise and acceptance of best practice in risk management spreads through local companies it can only benefit foreign firms that do business there and those relying on them in their supply chain. It just may take some time – as Genya says, “It’s not an overnight operation” – but the progress in some cases is startling.

So does Genya expect to soon be competing with emerging market firms for international companies’ business? “That is a bit more difficult,” he says. For now at least, those firms have domestic expertise, but not the wider experience international businesses want, he argues. “They would need to be present in our core territories too, and today they are not; they are not really in Europe, and they are not really in the US.”

Added to that, on the claims settlement side the comfort of a familiar brand also plays a part when it comes to insurance to give the international players an advantage. “After all,” says Genya, “insurance is only as good as your ability to collect your claims.”

Most importantly, though, the aim is to make it unnecessary for businesses to choose between a local or international player. “It is not one of the other in my opinion,” he says. “The trick is to become a local company that brings with it your international skills set.” And, in fact, that’s not bad advice for anyone doing business in emerging markets.