I’m currently managing director of Content and Business Planning at The Korea Times. Before I took the current position in early 2024, I served as managing editor in charge of both paper and online for over three and a half years. In 2015-2018, I worked as Singapore correspondent covering ASEAN nations.
What chief financial executives must know in investment
By Yoon Kyung-sik
By Kim Jae-kyoung
As more and more companies are encouraged to expand into rapid-growth markets, chief financial officers (CFOs) are even more frequently asked ― and sometimes pressured ― by boards and investors to outline how they are capturing the potential in the new overseas markets.
Where others see primarily opportunity, the CFO must be able to spot “complexity” ― the costs both manifest and hidden. And this requires not just an initial investment evaluation on the pre-entry stage but a continuous scrutiny throughout the entire life cycle of the investment.
Since every rapid growth market has its unique opportunities and challenges, it would be difficult to generalize the practical implications of the recent Ernst & Young research for CFOs. But we believe that they should bear in mind the following “lessons” when considering an investment in rapid growth markets.
● Place investment strategies under the microscope.
Unlike CEOs who might get excited more easily about the prospects with rapid-growth markets, CFOs should have a key responsibility to evaluate strategies and make sure that they stack up. An awareness of the real costs is essential and a healthy dose of skepticism can play an important role in tempering unchecked enthusiasm.
● Pay close attention to operational costs.
Investment in these markets typically relies on a high-volume, low-margin business model. This can be extremely profitable, but problems quickly arise if operational costs prove higher than expected. CFOs must ensure they scrutinize operational costs carefully on a regular basis so the investment remains viable over the long term.
● Stay involved throughout the process.
Our research suggests that the CFO involvement in rapid-growth investment is skewed toward pre-entry stages. But this can be a risky approach as these markets evolve and change quickly. CFOs should either remain closely involved or at least be informed throughout the entire investment life cycle.
● Strike a balance between local and global knowledge.
CFOs should make certain that there is a balance struck between local managers with a deep understanding of the business environment and strong oversight from the headquarters. Global talent management programs can help improve the mix of skills across local and global environments.
● “Futureproof” your investment.
A business environment is always changing in rapid-growth markets. Markets continue to open up; regulatory environments are developing and labor costs are on the rise. CFOs need to test the viability of their investment against a range of future scenarios based on their expectations of future growth and development in the market.
● Carry out “integrity due diligence” on potential partners or acquisition targets.
In addition to carrying out financial due diligence, CFOs should ensure that they conduct integrity due diligence, which should include checking the cultural fit between the two organizations and obtaining information about the local company from a broad range of sources, including customers, regulators and suppliers.
● Become an employer of choice.
CFOs also need to consider how they will continue to attract and retain the best talents. They should take a long term view, invest in training, build strong relationships with local communities and ensure their compensation packages remain competitive, particularly when compared to local companies.
● Put in place a strong risk and controls environment.
Managers in rapid-growth markets must have some degree of autonomy to make decisions locally, but this should be granted in the context of a strong risk and controls environment. This means that all decisions happen within agreed parameters, thereby preventing excessive variation across markets.
● Accept that some costs will be high.
There should be an understanding that some costs will be high, as this is an inevitable part of the investment process in rapid growth markets. For example, investment in local R&D centers is often a key aspect of the overall strategy. While the costs may be high in the short term, this decentralization will be a key determinant of success.
● Take a long term view.
Rapid growth inevitably means there will be bumps along the way such as currency volatility, possible asset price bubbles and political unrest. Accepting these will happen is a part of investing in these markets. Yet in most cases, they will not affect the overall viability of the investment. Vigilance is crucial but the costs and risks should not deter investment.
Yoon Kyung-sik is an assurance leader of Ernst & Young Korea