Offering capsule summaries of 25 emerging-market companies, Antoine van Agtmael dispels the belief that only established corporations can compete globally. An experienced investor at the World Bank Group, Van Agtmael shares his insights and revelations about today's marketplace.
Antoine van Agtmael has served as Division Chief in the World Bank's Treasury operations and as Deputy Director of the Capital Markets Department at the International Finance Corporation.
Antoine van Agtmael
Antoine van Agtmael founded EMM with a vision: to offer superior returns with lower risk by applying modern techniques to investing in carefully selected emerging markets equities. He is widely considered a pioneer in emerging markets investing, having coined the term "emerging markets" to describe this unique and exciting asset class. Mr. van Agtmael has served as Division Chief in the World Bank's Treasury operations and as Deputy Director of the Capital Markets Department at the International Finance Corporation. At the IFC, he created the world's first emerging markets equity index and wrote a groundbreaking book on emerging markets. He earned an M.B.A. from New York University, an M.A. from Yale University and a B.A. from the Netherlands School of Economics.
Well, it's obviously delightful to be here, I've always been a little jealous of all these other peoplewho gave book talks, and now I have a chance to do it myself, so that's very exciting. And then inthe midst of family and friends and neighbors, that makes it even more exciting. If I may singleout my parents in law who came over especially from Florida. That's loyalty. To be here today.And of course my own family, my kids, it keeps Peter out of Iraq so that's great, and...Well, what is this book about? This book is more than anything about a phenomenon, aboutcompanies, and about people. The phenomenon is what I believe what will define our age morethan anything. It is the biggest shift in the global economy and in global power since the industrialrevolution. That time, you may remember, it was a shift toward the West that took us centerstage. This time it is a shift away from the West and developed countries to emerging markets. Itis a shift that I believe that is extremely pervasive.It will effect everything and everybody. Everything from how we deal with China and Iran toinvesting. Everybody, because it affects investors, it affects consumers, it affects job seekers. Soit's a very pervasive shift. Now, to talk about this, it may be good to start with a recent experienceI had. I woke up one day, took a jog. Took a jog on my Nike shoes, but they were made byYuyin, in China. By the way, they make one out of six athletic shoes and dog shoes, etc., in theworld. Then I made a call on my Samsung phone, made in Korea. They make, by the way, theyare the third largest cell phone maker in the world.Then answered my email on my IBM novo think pad. It was taken over by the novo, which is nowthe third largest PC maker in the world, again. Then changed my reservation, because I was inMontreal, changed my reservation through an agent in India, and then took a plane, very niceswanky roomy, jet, made in Brazil by Amber Air. And then I got on the plane, relaxed, had aCorona beer from Mexico, and listened to my iPod, made in China by a company called Homehi.Welcome to the emerging market center. This is how things are changing. And of course, it's notjust companies. It is people who do this. The Carnegies, the J.P. Morgans of this century aregoing to be born in China, in Brazil, in Korea. And writing this book was meeting those people.And I tell you, that was great fun. Let's talk for a second about this very big shift that we areseeing. Just as a reminder.When I was a young banker, one of the first things I had to do was write a study on recyclingpetroleum, I could do that again today. And I went to the head of the trust department of BankersTrust at the time and asked him about whether it was a good idea to look at markets and createan investment capability overseas, and he had these big red suspenders and he snarled at meand said, "There are no markets outside the United States." Now of course, that was anexaggeration already at that time, but it just gives you a sense of how things have changed.Then in 1981, I coined this word "emerging markets" to give it a bit of a lift. Third world didn'tsound very good to invest in. And people thought of these countries as basically crazy casinos,very poor countries, certainly not places you put pension money, that was just insane. Well, if youhadn't done it in the last 4 years, you wouldn't have made 37% per year. So it wasn't as insaneas it looked. Then in 88 when we started our firm and I think Hilda and Mike are here, we startedthe firm together, and it at that time, remember, Russia and China were still Communist countries,India was a socialist country. Brazil, frankly was a mess. Had a couple thousand percent inflation.Now fast forward to today. Today if you look at it, 75% of our treasury bills are held by China. Inother words, if you go to the bank and get a mortgage loan, say thank you to China because theykeep the interest rates low. Korea, which just 8 years ago was a basket case, today has 3 timesthe reserves of the IMF. In fact, the IMF and the World Bank, important as they are, are no longerlending at the moment, taking the money back. Because there is so much money. That is thisshift that is taking place. China is a bigger importer into the US and into Europe than Japan.Those are the changes. Gazprom, in Russia, you have heard of. Provides 20% of the energy forEurope, Europe is very dependent on it. In other words, you see how we are becoming, insteadof dominant, more dependent. Tom Freedman said, "The world is flat." I actually think the worldis tilted toward emerging markets. Because if we now fast forward to 25 years from now, and Ican imagine that it is very hard to see this yet, but 25 years from now, emerging markets as agroup will have economies that are larger than the developed countries (United States, Europe, Japan) together.In fact, in 50 years, that's in the middle of the emerging market century, there will be twice aslarge. It is hard to imagine that it's not the US but China that will be the anchor economy of theworld. These are monumental changes, and I believe that we have two choices. We can eitherbe like the aristocrats of the 19th century, who saw the industrial revolution and poopoo'd it. Andwho saw the emerging middle class at the time and didn't take them seriously. Which was aclassic mistake of denial. Or we can say instead of this just being a brutal shock, this is actually avery exciting opportunity.That leads me to myth #1. There's still a misconception. We kind of assume that we'll always beon top. That the West will always be dominant. I don't think that's going to be the case 25 yearsfrom now. Now, in this whole process, there are a group of companies that a few years ago wehad not even heard of. That are now becoming world class powerhouses. Now, I describe 25 inmy book, so if you want to read about all 25 you have to buy the book. But let me just talk about afew of them and give you a sense of the change that has taken place.Take the company I already mentioned, Samsung electronics. They're not only the third largesthandset makers, no. If you buy one of these flash cards for your camera or your cell phone orwhatever, you have a chance of 1 out of 2 that it's made by Samsung because they make morethan 50% of these flashcards in the whole world, and they also make most of the memory in yourcomputers. Not only that, they have a brand name that is now more important than Sony's. Theyare number 5 in terms of the number of patents, ahead of any US company except IBM and HP.They have a research and developing project that is larger than Intel's. Their profits, by the way,are larger than Dell, or Nokia, or Phillips, or Panasonic, or any of those companies.You know what's very substantial companies. Take another one. Simix. Mexican cementproducer. It's boring stuff. Not so boring, actually, when you start to talk to them. Whathappened. We at some point thought that Mexican cement was so cheap we wanted to keep itout, so we put on a big dumping charge. Classic case, and there are many others, of shootingyourself in the foot. Because what happened?Okay, they went ahead and bought companies in Venezuela, in the Caribbean, in Spain, they lovebuying it in Spain because 500 years ago the Spaniards have came there, so they were reallyvery glad about that, and in fact most people thought, this is never going to work, well they arenow one of the most successful companies in Spain, and not only that, they became among thelargest cement producers in Europe, and they are now the largest cement producer in the UnitedStates, and what has happened to our cement? Then we imported one out of ten tons, now weimport one out of four tons. So protection certainly didn't help.Other example. Homehi. You just saw the iPhone being introduced by Apple? Guess whomakes the iPhone? It's Homehi, again. They also make your iPod, they make your Dellcomputer, they make Nokia phones, they make Sony Playstations. And they make them notbecause of cheap labor. They make them because they're smarter and faster. Give an example,Terry Gao, who is this incredibly dynamo, has these huge factories in China that have more thana hundred thousand people working in them.I visited them. They're unbelievable. And when he saw the iPod, he immediately recognized thiswas good, stepped on the next plane, went to Apple and said, I want to make this thing. BecauseI only want to make things that are the most difficult to make in the world. That's the kind ofattitude that has brought him to this point. Hyundai, another company that you know, youremember how 10 years ago, Hyundai was literally the joke of the Jay Leno show. Remember?Today, their chairman, who by the way was in jail for awhile, but their chairman said at the time,We want to be better than Toyota. Now that of course sounds ridiculous. But it wasn't today, ifyou look at the JD Power survey. Hyundai has better quality than Toyota or GM or Mercedes orVolkswagen or any of those companies. They are a serious car company. And how? I try to figure it out.And one night I remember being in an interminable phone call as I have many, as research for thisbook, with a group if engineers in Hyundai, and I wasn't getting anywhere in trying to understandwhat was happening and finally I said, Give me an example - and there was this big back andforth and talking - and finally they said, Well, we'll give you an example. We had a guy here whohad just gotten married, and we had this little whisper in one of the windows, and we wanted toget rid of this whisper. So the guy just stayed at the factory for 6 months until he got this whisperout of the window, and went back to his bride months later, and got 2 days of vacation. That'show these companies work.And there are many others, and this is the interesting thing. In the 58 of the 500 Fortune 500companies in the world that are now from emerging markets, only 6 of those I included in thebook, because I only include the best, I wasn't going for the biggest, only the best, I was going forcompanies that were really leading in their industry. And it's in all kinds of areas. Television, forexample. Here you have televisa, in Mexico. Now televisa is big in Mexico. If you want to be anactor in one of their soap operas, it is a well-known fact that their school for actors is much morecompetitive than Harvard and Yale, and we all know how competitive they are. And they makethese telenovelas, basically soap operas, that are viewed all over Latin America.They're viewed by the Hispanic population in the United States, more popular, often, than thenetworks, but beyond that, when one of their famous stars, Veronica Castro, who is an individualsoap lady, arrived in Moscow, what happened? She saw this huge group of people outside, shesaw the red carpet, she was whisked off to the Kremlin because Putin and the leaders werewatching. She went to Bosnia - it's a Cinderella story. They're all Cinderella stories. There's onetheme: Cinderella. Very simple. Beautiful girl, poor, rich guy, and fall in love, and that's the storyalways. Very popular in emerging markets. And so they - she goes to Bosnia, same thing,Philippines, same thing, because they're watched everywhere.In fact, I was sitting, in another example of how things are changing, more people are watchingBollywood movies than Hollywood movies. They don't pay as much for the ticket price, but theywatch more. I was sitting recently on a plane next to an Israeli. And he saw - he was a writer -and he saw that I was going through my - obsessively, as writers do - trying to correct my pages,and he said, Oh I know about this. I grew up on-- and he started to sing some of these famousBollywood songs that I had never heard of. So this is the changes we are seeing. And we still kindof lull ourselves to sleep with the idea that it's all because of cheap labor. Don't you believe it.Of the 25 companies in this group, cheap labor may have played a role once, but at the momentit's only important in four. Resources only a few. So 14 of these 25 companies are high tech,capital intensive countries. TSMC, a semiconductor factory in Taiwan for example, has what iscalled a fad, they make basically logic chips, logic semiconductors. And that is the most capitalintensive business per square inch in the world. Cheap labor?By the way, when he started his factory he went around, went to Gordon Moore of Moore's Law,very famous, very smart, and said What do you think of this idea? And Gordon Moore said, It's avery bum idea. This is now the largest independent fad in the world. So there's another myth.The myth that these are just imitators. Of course we know some of them are imitation. Homes,for example, Phillips stole its lightbulbs from GE during a ten year window that they didn't believein intellectual property rights, and we have all done this, and emerging markets companies havedone it, but they go way beyond this.Sussul in South Africa now makes oil either from gas or from coal. And they're doing it in a veryefficient way that costs less than the total cost of what you buy oil for at the moment. So it's analternative that we tried in the Carter administration and never could get to work. I said, This is aninvention from 1929, and they said, Yeah, but remember, if you go to a restaurant and you get therecipe book from the cook, do you think you can make it as well as they can in the restaurant?Same thing there. They have brought this to perfection.So there's a lot of innovation. In Brazil, when President Bush gave a speech in which hementioned biofuels and ethanols, etc., he had learned this at a luncheon with Lula, and in Brazilthey're already energy independent and they have 3,000 gas stations where you can guy ethanolmade tree birches, buy it very cheap, and much more environmentally friendly, and it's basically,they have achieved where we haven't even started. They have flex fuel complete fleet of flex fuelcars. So they're no longer imitators.Then there is a final myth. And that's a dangerous myth. It's a myth that can lead to the wrongreaction, in my view. To a reaction of protectionism. And t hat's the myth that the world is a zerosum game. Well, the world is not a zero sum game. Our exports to emerging markets in the last20 years, have gone up 370% from the whole developed world. An enormous amount. We'reexporting more, and our services are used there, and not only is that the case, but there is a lotthat we can do. We have, in the United States, a very very innovative companies, from Google toApple, to Bloomburg, you name it.A competitive response is quite possible, and that is the creative response that I believe will helpus much more than a protective response. Remember what has happened to cars, toelectronics, to cement, to steel, to protective response filled, but also remember what happenedwhen we got afraid. Of the Russians winning. Well, Kennedy came up with this crazy idea, itseemed, at the time, of putting a man on the moon. This gave the United States 30 years of technological superiority.Then we had another escape of the Japanese are coming. And again, there was a response ofprotectionism and there was a much more creative response of total quality management, etc.,and finally companies did quite well. In other words, it is quite possible to do this again. If you'restill nervous, think back. Think back to 500 years ago. It was not a period of great uncertainty.People felt scared. A period of religious wars. It was also a period where people broke out of themindset of several centuries, where they went on and increased trade, where they discovered theworld. That period was called the Renaissance. I believe we can have this again. If we areafraid, we lose. But if we seek a creative reaction, we win. Thank you very much.