CFOs, treasurers and other finance executives had better get used to doing things the "interesting" way. While the last five years have seen a steady stream of Western companies setting up shop in the world's biggest emerging markets, that stream is set to become a torrent as companies begin to realize the marketplace potential of places they once saw mostly as havens of cheap labor. The most popular targets are Brazil, Russia, India and China–the countries colloquially known as the BRIC.

But after watching companies sit on the sidelines since 2001, increasing profits through consolidation rather than top-line growth, the gold rush to stake out new turf has some executives and analysts worried: Are Western companies turning a blind eye to a wide range of political and financial risks because the potential reward is so tantalizing? Fred Cohen, a New York-based partner with PricewaterhouseCoopers (PwC) who heads up the consumer and industrial products advisory practice, thinks so: "There's a clear need for companies to pay more attention to political risk. Even those who do focus on political risk do it in a very unstructured way." To be fair, companies themselves seem to be aware that there's a gap here. In a recent survey by PwC and New York-based political risk consultancy Eurasia Group, 71% of respondents admitted that they could be managing this risk more effectively.

Anecdotal evidence suggests that some expansion plans have already run into problems. Take, for instance, the cautionary tale of General Motors Corp. in China. The U.S. automaker launched a joint venture with two local companies in November 2002 to build a small urban run-around–the Chevy Spark–under license. The deal was supposed to be a smart one for both sides. The Chinese manufacturers would get access to GM's know-how, and the U.S. automaker would broaden its footprint in the world's most exciting economy.

GM's benefits were short-lived, however. Soon, the Spark found itself competing against an almost-identical vehicle made by a competitor–Chery Automobile. GM promptly filed a lawsuit, alleging that the rival car had "extreme similarities" to the Spark and that Chery had produced the model "through copying and unauthorized use of [GM's] trade secrets." Patty Zhao, a GM spokesperson in Shanghai, notes that the lawsuit was settled at the end of last year.

Ian Bremmer, president of Eurasia Group, says these problems are endemic in China, given the looseness of its intellectual property rights regime. "Designs are often copied without violating existing Chinese laws," he says. "Chery was able to patent its car's design in China very easily, and it was difficult for GM to establish the case under Chinese law that Chery stole its design. Even foreign firms that choose their partners very carefully are still vulnerable to design leakage and outright piracy." Despite GM's lawsuit, Chery vehicles are scheduled to start selling in the U.S. and Europe within the next 12 months.

Horror stories such as this one notwithstanding, companies are moving forward at a very uncorporate-like pace, and it's not hard to see why. Over the next 15 years, the number of middle- and upper-income consumers in the world's population is set to balloon to 2.3 billion from 1.3 billion. Much of that growth will happen in China, India and other emerging markets. In China, for example, the number of people earning between $10,000 and $25,000 per year is set to grow to 625 million by 2020 from the current figure of 163 million, while those earning more than $25,000 will rocket to 117 million from just seven million today.

By 2040, Goldman Sachs has suggested that the combined gross domestic products of the BRIC countries will overtake that of the current G6 (U.S., Japan, Germany, U.K., France and Italy). For executives, who have spent much of the last 10 years competing furiously to eke out relatively modest growth in the mature developed economies, the opportunity to take their products to these vast, increasingly wealthy populations is proving irresistible. "Business was so traumatized by the experiences of the last few years–from the Asian financial crisis to the bursting of the tech bubble, to 9/11, to Enron and WorldCom–that companies have been sitting on larger and larger piles of cash," notes Paul Laudicina, the Alexandria, Va.-based managing director of A.T. Kearney's Global Business Policy Council. "With the shift of the locus of consumer power moving to big emerging markets, investors are seeking to take advantage of robust growth opportunities these markets provide."

BRIC OR BUST

A survey of over 1,400 CEOs by PwC this year found that 71% are planning to do business in at least one of the BRICs within the next three years. The reason cited by three-quarters of the respondents: a strategy to increase the bottom line by exploding the top line through BRIC market revenues. At the end of last year, an A.T. Kearney survey asked the same sort of audience which locations they found most attractive for foreign direct investment (FDI). Not surprisingly, China and India occupied the top two positions, while Russia and Brazil placed sixth and seventh, respectively.

This promise has attracted significant commitment from some of the globe's biggest companies. Wal-Mart Stores Inc., for example, already manufactures a lot of its product in China and now plans to hire 150,000 employees in the country over the next three years, according to one A.T. Kearney report. In total, the most recent figures from the Organization for Economic Cooperation and Development show that China has received inward flows of investment worth $151 billion in the three years prior to 2005, while India has received investment worth $13 billion. In both countries, the 2004 figures set a new peak.

While most of the macro-expansion strategy has been driven by CEO mandate, CFOs and treasurers are leading the execution. In cases where finance has been left out, the results are not always so pretty. Chris Morgan-Jones, the U.K.-based head of business intelligence for security consulting firm Kroll, gives one extreme example: "We were called in by a mining company whose chairman and CEO had signed a memorandum of understanding to buy certain assets from a Russian company. It had all been done in quite a hasty fashion and without buy-in from the rest of senior management, who then had to work out exactly what they'd bought."

This may be an extreme example, but it's not atypical. Best practice in any emerging market expansion is to involve finance and treasury execs from the get-go, says Tom Gunson, a London-based partner with PwC and leader of the firm's financial effectiveness practice in the U.K. Sadly, best practice is not standard practice. "Unless treasury departments are well integrated with the rest of the company, business units will head off down the road to make a foreign acquisition or set up overseas and will tend to bring the treasury in very late–and often too late," he says.

What's required is for CFOs and treasurers to take a pro-active approach–to both the reward and the risk. Nestl?(C) has been present in Russia for 10 years, during which period a total investment of over $500 million has seen the operation grow from a 15-strong representative office to a fully fledged company employing close to 10,000 people, according to the company's Moscow-based CFO for Russia, Philippe Blondiaux. "The days when the role of the CFO was limited to reporting, bean-counting and cost cutting are definitely over. What is expected from us is to be co-pilots of our business. In a country like Russia, which is set to be one of the growth engines of the Nestl?(C) Group, one of my personal objectives is to see where to invest to get the best possible return."

POLITICS TRUMPS FINANCES

When it comes to working in emerging markets, treasurers cannot just look at foreign exchange risk or even credit risk with customers. Jolene Varney, the Dallas-based group treasurer for Kimberly-Clark Cos. (KCC), notes that the organization has a strong franchise in Latin America, which, given the current climate, must focus as closely on politics as it does on currency.

Besides reading local newspapers and bank reports on trends and relying on instincts, there are quantitative methods to manage political risk. For instance, PwC's Cohen says that Eurasia Group (with which PwC recently forged a strategic alliance) produces regular indices that track the level of political risk in different countries. He advocates using such a metric as a "barometer–just to give you a sense of where things are headed." This kind of approach served some companies well when Argentina devalued the peso by 40% at the start of 2002. Many foreign investors lost millions literally overnight, but Cohen says that some companies had seen the devaluation coming. "There were ways to mitigate the risk," he says. "Some moved their production facilities into Argentina so their cost-base was in the peso rather than a harder currency. Some took similar steps–abandoning the dollar and switching to the local currency. Others tried to reduce their equity exposure by looking for a local joint-venture partner."

Managing political risk is a big piece of the jigsaw puzzle for companies that want to grow their presence in the BRIC–but it's only one piece. CFOs and treasurers still have to perform their more traditional roles (see sidebars) and will often have to do so without access to the kind of tools that are taken for granted in more mature economies. One of the frustrations for many of these execs is the continuing necessity to rely on parent company funding or bank loans. Capital market financing would ordinarily be a cheaper option, but BRIC markets are either illiquid or carry so much sovereign risk that the company can't achieve the kind of rates it deserves. The latter is the case for Nestl?(C)'s Russian business. "We're one of the world's last AAA-rated companies, and there is a growing bond market in Russia, but the problem for us is the country's sovereign rating of BBB," says Blondiaux. "In other words, our rating is not recognized and priced as it should be." In fact, he says, it's more than 80 basis points cheaper to borrow money in Switzerland and lend it on to Russia than it would be for the Russian company to debt-finance itself locally.

There are similar frustrations for treasurers in China, says Peter Wong, AIG's Hong Kong-based regional treasurer who comments in his capacity as convener of the Hong Kong Association of Corporate Treasurers (HKACT) and chair of the Asia-Pacific Treasurers Forum. For a start, he says, it is difficult to guard against foreign exchange and interest rate risks owing to an absence of suitable hedging instruments. China's finance ministry and central bank have been gradually liberalizing the derivatives market, but volumes in key products like interest rate swaps are still very thin–and the problem is exacerbated by the fact that the corporate bond market is in its infancy, meaning that companies have to rely on short-term bank loans for funding.

THE SINS OF THE COUNTRY

Cash management is also tricky, Wong says. "Companies can't borrow from each other, nor can they have an overdraft account, which means that netting or notional pooling of cash is not permitted." Even moving cash within the country can prove difficult unless the company has the backing of local government officials.

CFOs and treasurers will also have to think about whether they need local staff to run their BRIC operations. KCC has chosen to keep everything central; Varney's entire treasury team numbers 10 people, and all but one are based in Dallas. Nestl?(C), despite its size in Russia, also has only four treasury or finance staffers in-country, including the regional CFO, Blondiaux. Almost all of the treasury operations are run from Switzerland.

In Asia, many companies already have regional treasury centers in Singapore or Hong Kong and have decided to cover their new markets from there. Some–like McGraw-Hill–are deciding that they need staff on the ground in India and China as well. "India is like a world in itself," says McGraw-Hill Treasurer Weisenseel. "To cope with the market's complexity, we felt we needed people on the ground." In India, the company has already hired "a couple" of people locally to run a shared service center–treasury is just one of the corporate functions that use the center.

Having local resources does not relieve Weisenseel from immersing himself in the minutiae of the region's financial regulation and business practices. While recently in Singapore, he spent much of his time meeting with the company's local bankers to get advice on how best to satisfy the company's treasury needs in the region.

In China, others are also choosing to locate treasury staff in-country, says the HKACT's Wong. Nokia's China treasurer is based in Beijing, Procter & Gamble's is in Guangzhou and General Electric's is in Shanghai. The American Chamber of Commerce in Guangdong, meanwhile, has over 800 members.

It may appear as though the best way that CFOs and treasurers can support the business as it expands into the BRIC countries is either to make the work as unobtrusive as possible, or to act as a counterweight to the see-no-evil enthusiasm of other executives. There's some truth in that, says Weisenseel–but that doesn't mean he has to be a kill-joy, he stresses: "I look out 10 or 15 or 20 years, and I really think that these markets are going to provide the future growth of the company. Believe me, I share the excitement. I'm on the train as well, and we're moving forward at 100 miles per hour."