Where will all the FDI go? - Views on News from Equitymaster

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Where will all the FDI go?

Jan 22, 2009

FDI to decline in emerging markets
With the financial crisis deepening in 2008, emerging markets which were believed to be decoupled from the developed world were in for a rude shock, as Foreign Institutional Investors (FIIs) relentlessly dumped stocks in these countries causing the stock markets to plunge. But it appears that foreign direct investment (FDI) is also most likely to follow suit. As per Bloomberg, FDI in developing nations will drop by US$ 180 bn, or 31% this year as global recession compels multinationals to cut spending on factories and mines. FDI fell an estimated 10% in the developing world in 2008. Companies such as Rio Tinto, Honda and Hitachi Construction have either shelved their expansion plans or delayed the same in markets such as Brazil, India, China, Argentina and Turkey. As reported on Bloomberg, according to World Bank estimates, FDI in developing countries is expected to shrink to US$ 400 bn this year from an estimated US$ 580 bn in 2008 and US$ 500 bn in 2007. Besides global trade contracting this year for the first time since 1982, pressure is also expected to mount on the currencies of these nations. Just like the developed world, emerging nations are in for some tough times indeed in 2009.

China's growth slows, Japan's exports plunge
Bloomberg reports that China's GDP (gross domestic product) growth slowed down to 6.8% during the October-December 2008 quarter. This is the slowest pace of growth for the country in a span of seven years, and is largely a result of sharp slowdown in exports to the US and Europe. Economists now predict the country's growth to weaken to 3% to 4% during the current quarter, before stimulus measures kick in and export demand starts to revive.

China is not the only major Asian nation to feel the pressure of a slowing global demand. It has Japan as company. Asia's largest economy has recorded a 35% YoY decline in exports during December 2008. This signals that Japanese companies will now be forced to cutback on production and downsize employees, thereby driving the economy deeper into recession. This decline in exports is the largest the country has faced since 1980.

In the meanwhile, while stocks in China are trading marginally in the positive, Japanese markets are trading weak currently. The US markets closed strong yesterday led by strong earning report from the technology major IBM. The Dow Jones Industrial Index closed 3.5% up.

Dr. Reddy's German angst
Indian pharma major, Dr. Reddy's made headlines in 2006 when it acquired the German company Betapharm for US$ 570 m, which was touted as the largest acquisition made by an Indian pharma company. At that time, because Germany was a branded generics market, revenue and profit growth expectations from this company were high as it was the fourth largest player in Germany with products at the higher end of the value chain. But then the tide turned since then.

Problems began with Germany opting to intensify efforts to make healthcare more affordable as a result of which the government made it mandatory that there be a certain differential between the price of the branded drug and the patented one. This led Betapharm to undertake price cuts across its product basket, consequently impacting its revenues and profits.

Then the company began to face supply constraints when its key supplier Salutas failed to meet production schedules. Of course, this problem was resolved by shifting the manufacturing to India. But the main problem of pricing pressure continues to persist. Moreover, the market has now shifted towards a tender based model wherein insurance companies have a larger say in the prescription of the drugs. Therefore margins will be on the lower side with volumes being the key driver.

To add fuel to the fire, the company had to withdraw the drug 'Olanzapine' from the market as the German court ruled in favour of the innovator. The management of Dr. Reddy's remains hopeful that things will improve going forward. But the way things stand now, what began as a huge promise seems to have turned into a damp squib.

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