Best Foreign Markets of Best Foreign Markets of TomorrowTomorrowWhat Lies Beyond the BRIC

Presented by Eaton & Co.May 15, 2012

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Today’s DiscussionToday’s DiscussionLife beyond the BRIC (or BRICS) --

Emergence of Frontier markets

Process of evaluation and prioritization of new markets based on specific needs

Best markets by geographic region

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Eaton & Co.Eaton & Co.Founded in 1987Focus on global developing and

emerging marketsOffices/branches in major

developing regionsRecord of successful entries into top

priority marketsClients across industries, from

aerospace/defense to consumer goods and industrial manufacturing to retail

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History of Emerging History of Emerging MarketsMarkets

Year

Less than 10%China enters as

a supplier

1980

23%Emergence of BRIC countries

- Size- Supply resources- Pent-up demand

1999

39.7%- Economy

becomes global

- BRIC countries outperform the “old” world of US and Western Europe

- Prominence of new markets in all parts of the world promoted by liberalization of trade and internal policies

2011

56.2%New markets

of:Asia:

-Vietnam-Bangladesh-Sri Lanka

Latin America:-Columbia-Peru-Paraguay-Mexico

Sub-Saharan Africa:

-Ghana-Nigeria-Mozambique

Ex-Soviet Union:

-Kazakhstan-Uzbekistan

2021

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The new markets are very The new markets are very appealing.appealing.- Size- Growth- Market Demand- Weak Local Competition- Sourcing Opportunities- Cost Advantages

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Experience with BRIC revealed Experience with BRIC revealed stumbling blocks for any new stumbling blocks for any new market.market.- Political Instability- Legal Uncertainty/Trademark Protection- Corruption- Energy Costs/Availability- Low Consumption Ability- Cultural Issues:

• Management• Training• Product Acceptance

- No Data- No Means of Validating Possible Partners- Inadequate Infrastructure- Security Issues- Government Heavy-Handedness

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AS NEW MARKETS AS NEW MARKETS DEVELOP, COST DEVELOP, COST ADVANTAGES ADVANTAGES DISAPPEAR AND DISAPPEAR AND COMPETITION COMPETITION INTENSIFIES.INTENSIFIES.

We’re off to new frontiers! 7

No single market is good for No single market is good for everyone!everyone!

Process of Identifying and Evaluating New Markets

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Defining Your Company Needs – Are Defining Your Company Needs – Are you interested in selling or producing you interested in selling or producing in new markets?in new markets?

A. Volume Growth

B. Cost Advantage

C. Search for Innovations

In the Specific Market

Use One Market as a Hub to Enter the Region

Outsourcing

Own Manufacturing Facility

Licensing Technologies

Joint Venture

Supply Source

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Developing screening Developing screening criteria.criteria.Factor

Size

Purchasing Power

Natural Resources

GDP Trend

Business-Friendly Climate

Key Elements

-Market Growth-Labor Pool

-Market Potential-Education Level-Market Segmentation-Sourcing-Access-Growing Economies-Economic Perspective- Infrastructure-Political Stability-Experience with Foreign Investment

-Partnerships-Legal Environment/Corruption

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Competition - Internal-External

Population in emerging Population in emerging markets grows fastest.markets grows fastest.

11Source: IHS Global Insights

How attractive are these How attractive are these markets for consumption of markets for consumption of goods and services?goods and services?The consumption in US $’s per capita growth from 2010 to 2021 is impressive.

12Source: Deloitte Report

Depending on your needs, Depending on your needs, each continent offers each continent offers opportunities.opportunities.

Low-End Internal Consumption

High-End Internal Consumption

R&DSkilled Labor

National ResourcesLow Cost Labor

Middle East/North Africa

Latin Americ

a Asia

Sub-Saharan Africa

Ex-Soviet Union

Emerging

Europe

13Source: Eaton & Co. Analysis

Region – AsiaRegion – Asia

Attractiveness Concerns

-Access to maritime routes-Integration with global economy

-Strong and still inexpensive labor force

-Traditions of democracy in major countries – Indonesia, South Korea

-Shift to global trade in previously closed countries (Burma, Vietnam)

-Natural Resources

-North Korea is a destabilizing factor

-Security issues (Philippines, India)

-Propensity to natural disasters (tsunami, earthquake)

-China maritime ambitions

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Best Markets in AsiaBest Markets in Asia

CountryGDP

Growth2010-2025

Population(M)

RiskBest

Features

Vietnam 6.9% 88 Low to Medium

- Experience in subcontracting to China

- Pent-up demand

Bangladesh

Indonesia

6.3%

6.2%

142

238Low

- Great for growth and sourcing

Burma 5.8% 48 Medium - Labor cost advantage

- Low-end market

- Natural resources

Philippines 5.5% 92 Low - Rapid development

- Business friendly

South Korea 4.1% 49 Low - Strong manufacturing and R&D

15Source: Business Monitor

Region – Sub-Saharan Region – Sub-Saharan AfricaAfrica

Attractiveness Concerns

-Chinese demand for African natural resources lifted economy

-Explosion of a mobile phone market led to fast developing “grey” economy

-South Africa provided a model of peaceful transition and prosperity

-Unstable regimes spill violence over the borders disrupting economies

-South Africa begins to face declining growth, high unemployment, and after Mandela the future is uncertain

-Security risk is too high

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Best Markets in Sub-Saharan Best Markets in Sub-Saharan AfricaAfrica

CountryGDP

Growth2010-2025

Population(M)

RiskBest

Features

Nigeria 7.7% 163 High - Strong economy

- Resources- Health and birth rate improvement

Ghana

Mozambique

7.6%

7.6%

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24 Low to Medium

- Political stability

- Reforms designed to encourage investment

Botswana 5.5% 2 Low - The most peaceful pied-a-terre into Africa

South Africa 4.1% 52 Medium - Consistent policies

- Rising middle class

17Source: Business Monitor

Region – Emerging EuropeRegion – Emerging Europe

Attractiveness Concerns

-Strong democratic principles

-Educated labor force-Geographic advantages for global integration

-Best source for R&D leads to creation of combined, more powerful markets

-Euro zone decline affects new EU members

-Dependency on Russian gas

-Emergence of social programs adds costs to labor

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Best Markets in Emerging Best Markets in Emerging EuropeEurope

CountryGDP

Growth2010-2025

Population(M)

RiskBest

Features

Turkey 5.4% 75 Low - Traditions of foreign investment and co-operations

- Growing middle class

- Location

Poland 4% 40 Low - Strong manufacturing base

- Developed academy/R&D

- Educated market

- Political will

Czech Republic

Hungary

Latvia

Estonia

1.8%

2.1%

2.7%

3.4%

11

10

2

1.5

Low

- Best for R&D sourcing

- Potential for tourism and real estate

19Source: Business Monitor

Region – Latin AmericaRegion – Latin AmericaAttractiveness Concerns

-Natural resources-Brazil serves as a model of peaceful development

-Tradition of working with foreign investors

-Strong manufacturing base

-Disruptive regimes of Venezuela and Argentina affect the region

-Drug cartels in Mexico a threat

-High inflation, especially in Brazil, may weaken the markets

-Recent nationalization of foreign banks (Argentina, Bolivia)

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Best Markets in Latin Best Markets in Latin AmericaAmerica

CountryGDP

Growth2010-2025

Population(M)

RiskBest

Features

Panama 5.5% 3 Low - Location- Growing trade

Peru 4.8% 30 Low to Medium - Commitment to attract foreign investment and growth

Columbia 4.2% 48 Low - Infrastructure- Natural

resources- Political

stability

Chile 3.3% 17 Low - Strong stable market

- Natural resources

Mexico 2.7% 115 Low - Traditional ally- Dramatic rise

in the middle class

- Developing academia 21Source: Business Monitor

Region – Middle East/North Region – Middle East/North Africa (MENA)Africa (MENA)

Attractiveness Concerns

-Natural resources-Skilled labor force-Young population-Geographic position

-Iran-Political Turmoil-Palestinian/Israel conflict

-Small local population dependent on export labor

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Best Markets in MENABest Markets in MENA

CountryGDP

Growth2010-2025

Population(M)

RiskBest

Features

Libya 13.3% 6 Medium to High - Natural resources

- Liberalization of trade

Iraq

Egypt

12.1%

4.9%

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82

High to Medium

High Now/Medium Long-Term

- Growing market

- Demand for manufacturing

- Young population

- Natural resources

Lebanon 5.7% 4 Medium - Skilled labor- Traditionally

business friendly

- Gateway to the rest of the Middle East

Tunisia 5.6% 11 Low to Medium - Political situation stabilized

- Geography- Tourism

23Source: Business Monitor

Region – Ex-Soviet UnionRegion – Ex-Soviet Union

Attractiveness Concerns

-Natural Resources-Yet untapped markets

-Tradition of trade economy – “silk” road

-Russia penchant for re-integration

-Propensity to autocratic regions

-Very poor internal market

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Best Markets in Ex-Soviet Best Markets in Ex-Soviet UnionUnion

CountryGDP

Growth2010-2025

Population(M)

RiskBest

Features

Mongolia 11% 3 Low - Business friendly regulations

- Geography

Turkmenistan

Uzbekistan

Kazakhstan

Azerbaijan

10.2%

8%

7%

6.2%

5

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18

9

Low

Low to Medium

Medium

Low

- Untapped market

- Geography- Natural

Resources

25Source: Business Monitor

Is China passé or a frontier Is China passé or a frontier country?country?

Current Problems:

- Aging population

- High debt structure

- Increasing labor costs

- Government regulations

- Fragility of political system

- Risk for intellectual property

But Huge New Market West Of The Great China

Wall:- Natural resources- Some

infrastructure already in place

- 65% of total population, upwardly mobile.

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No single market is good for No single market is good for everyone!everyone!

Process of Identifying and Evaluating New Markets

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The path to successful entry The path to successful entry is not easy and often is not easy and often challenging…challenging…

- Addressing lower market needs

- Sensitivity to cultural issues/demands

- Human resources- Ability to find

business/market data when little is publicly available

- Contacts

Local Partnerships

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Partnerships may have many Partnerships may have many forms:forms:Total or partial ownershipJoint ventureSub-contractingAlliance with outside the industry

(e.g., the government or an association)

Knowledge exchangeOffsets

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PRO’S•Knowledge of local

market structure and culture

•Established representation and contacts

•Extra production capabilities

•PR showcase•Labor cost reduction

•Knowledge of local market structure and culture

•Established representation and contacts

•Extra production capabilities

•PR showcase•Labor cost reduction

SOLUTION

• Thorough vetting process

• Multiple and continuous information sources

• Start with two potential partners on a small sub-contracting basis

• Ongoing benchmarking against pre-established criteria

• Thorough vetting process

• Multiple and continuous information sources

• Start with two potential partners on a small sub-contracting basis

• Ongoing benchmarking against pre-established criteria

CON’S

• Learning curve can be costly

• Contacts’ value may change with each election

• Customer loyalty uncertain

• Local rivalries may have a negative impact

• History unknown

• Learning curve can be costly

• Contacts’ value may change with each election

• Customer loyalty uncertain

• Local rivalries may have a negative impact

• History unknown

Partnership is crucial to the Partnership is crucial to the successful exploration of new successful exploration of new markets but it has its dark side…markets but it has its dark side…

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TO WINTO WINBe Patient

Be Committed

Be Flexible

Be Intelligent

Stay Optimistic31

Q & AQ & A

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