Spotlight on the DEG head of department German Corporates

Mr. Thor, you and your department are responsible for the financing of German companies investing in future markets. What do German customers want and what does DEG have to offer them?

On the whole our German customers are looking for solutions which create an added value for them in handling the special challenges posed when investing in future markets. If, for example, a company is entering a new market with challenging institutional framework conditions, DEG's network and the political authority of the KfW Group protect our customers against potential negative experiences. This added value is strengthened by the fact that DEG uses programme financing to support German companies, for instance with market analyses, feasibility studies and training measures. This can positively influence the success of an investment to a large extent, and aid the company in gaining a foothold locally. From the financial perspective, DEG is able to offer good solutions with long-term financing which is also available in local currency, and the use of local assets for securing credit, or terms exceeding ten years. We also assume risks, i.e. we are directly involved through non-recourse financing, project financing, and equity and mezzanine financing solutions. At DEG, German companies obtain much more than "just" liquidity for their investments.

For which sectors is a direct investment in developing and emerging markets particularly interesting?

For a company with international operations the pertinent question is whether to export or produce locally. The route to accessing markets is actually always via trade, but at some point a critical sales volume is reached where a direct investment makes more sense. That's why it is not only the sector that is a major factor in a foreign investment, the target country and its current and prospective potential for demand is just as important. For Germany's highly technical industry, operating in narrow market niches with high global market shares, such as mechanical engineering and plant construction, local manufacturing is worth pursuing in cases where high volumes can be sold. A large number of German companies therefore produce in larger and structurally further developed emerging markets such as Brazil, China or Russia. But in many other future markets, such as on the African continent, they do not yet have their own local production facilities. Activities in the infrastructure sector and other industries closely related to infrastructure are promising – for example private-sector approaches to alternative energy generation and distribution, as well as in the construction and materials industry. There are also encouraging success stories in agriculture, tourism and the health industry.

One of the sectors which demonstrates growth potential is the automobile sector. What are the opportunities and challenges for SME automotive suppliers in developing and emerging countries?

Opportunity and necessity are closely linked, as manufacturers and suppliers are continually dovetailing their work. When automobile manufacturers migrate to new markets, automotive suppliers often expect to follow them as soon as possible. And this is very understandable too, because the suppliers, who represent around 80 percent of the added value of a car, have a large share in the success of German brands. The opportunity here is for manufacturers and suppliers to successfully establish their product as a benchmark in growth markets. Local production that offers excellent training and aims at complying with the highest requirements for quality, environmentally friendliness and social standards is a key component of the brand message and stimulates sales locally. It was not by coincidence that Volkswagen, for example, sold 1.6 million vehicles between January and June of this year, using large production facilities in China, while other European manufacturers only sold 30,000 imported units from South Korea within a year.

To be successful in future markets, realistic planning and consistent implementation are needed. Apart from the general cyclical nature of the sector, it is seldom sales that poses a problem. The stumbling blocks are often approval processes, a lack of access to electricity or gas and water, not enough qualified personnel or insufficient management capacities. The consequences are delays in start-up and prolonged set-up periods, budgets being exceeded, considerable quality problems and, in part, even shutdowns of the production facilities. If these difficulties occur at the same time as a cooling down of the economy, the outlook may seem threatening for companies. A financing partner who is experienced and successful in these regions of the world, who is on hand right from the planning stage with advice, action and funding is all the more important.

In October, the International Automobile Congress is taking place in Wolfsburg, Germany. DEG will be at the conference and is hosting a business breakfast for company representatives. What can participants expect?

The focus will be on investments in the ASEAN states and the opportunities offered by these economically highly dynamic regions. Up till now, Asian cars are, by far, the leading brands on this market. German manufacturers, such as Volkswagen, aim to significantly expand their activities in the ASEAN region. The opportunities are good, all the more so as VW has carried out pioneering work in future markets over the last few years. Now it is all about convincing the supplier industry to invest in ASEAN states. As financing experts, we will therefore focus particularly on the possibilities and challenges for automotive suppliers, and the specific features of these countries where DEG has already worked successfully for several decades. We plan to enter into discussion with experts from business and technology about the regional requirements of the ASEAN states, and enable automotive suppliers to gather insights from various perspectives.

What advice would you offer to German companies intending to invest in developing and emerging markets?

In treading new ground it is good to remember that it is impossible to know everything. More than 50 years of experience have taught us that no two countries are alike, and every investment project has its own individual characteristics. What worked in Mexico, doesn't necessarily fit the bill in China and could even be counterproductive in India. This is why alongside long-term orientated commitment and stamina, flexibility in thinking and taking action are good preconditions for successful investments in future markets.

Cornelius Thor has been Head of Department German Corporates at DEG since 2011. Previously, he worked in management consultancy and auditing companies in Germany and abroad and also worked in Eastern Europe, Central Asia and Africa.