The rise of CIVETS economies

Of all the world’s weird and wonderful delicacies, civet coffee is surely among the quirkiest. At a cool $50 per cup, the prized aroma of this luxurious beverage comes not from the hand of an expert barista, but rather the stomach of a nocturnal mammal.

Civets are cat-like creatures that feed on coffee cherries in the hills and mountains of Southeast Asia. Although civets can digest the flesh of the cherries, they pass the coffee beans, which become fermented by enzymes in their stomachs before being excreted. The civet’s loss is the coffee aficionado’s gain, however, because the enzymes give the beans, once thoroughly washed and roasted, a unique chocolaty flavor.

All of this makes not only for a fine cup of coffee, but also a neat analogy (and acronym) for the emerging markets of Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. The CIVETS contribution to the world economy can, after all, be likened to that of the civet cat’s: cheap local resource in, expensive global product out.

Robert Ward, global forecasting director at the Economist Intelligence Unit (EIU), coined the concept of CIVETS in 2009, when he recognized the rise of a second generation of emerging nations beyond BRIC countries. In 2001, Goldman Sachs chairman Jim O’Neill predicted that the fast-growing BRIC markets (Brazil, Russia, India and China) would be the world’s dominant economies by 2050.

Various attempts have since been made to identify the new BRICs, not least O’Neill’s subsequent, and somewhat broad, Next 11 (Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam), but Ward’s CIVETS creation is widely seen as the most accurate.

Ward’s belief that Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa are the post-BRIC economies most likely to deliver sustained growth gained popularity when it was espoused by former CEO of HSBC Michael Geoghegan in 2010.

This has led some critics to dismiss the concept as a convenient acronym disguised as a marketing ploy for HSBC’s own CIVETS investment fund. But we should remember where the term originated. As an impartial forecasting service, the EIU would have subjected Ward’s theory to robust analysis. In fact, what becomes clear when you analyze his seemingly random grouping are the many similarities between the markets. To operate successfully in these markets, global brands must overcome many linguistic and cultural barriers. This in turn presents huge opportunities for the localization industry, if we are prepared to embrace them.


CIVETS commonalities

First, CIVETS populations have an average age of 27 to 28, with median ages of 28 in Colombia, 28.2 in Indonesia, 28 in Vietnam, 25 in Egypt, 28.5 in Turkey and 25 in South Africa. By comparison, the average age in the United Kingdom and United States is 40, and 44.9 in Germany.

Indonesia is the fourth most populous nation in the world with 245 million people, and that figure is projected to increase to 313 million by 2050, which would give the archipelago a larger population than the United States has today. Hence, not only does the country boast a vast pool of cheap, educated labor, but enormous potential as a consumer market.

The remaining CIVETS are all in the world’s 30 most populous countries, with Egypt’s booming population (82 million) making it the largest Arab country. Needless to say, by 2050, the young, rapidly increasing CIVETS populations will form a stark contrast to the aging populations of the West.

Second, all CIVETS have proved relatively resilient during the global economic crisis. In 2010, the EIU predicted the group would post an average annual gross domestic product (GDP) growth of 4.5% until 2030, a figure well above the 1.8% forecast for the G7 (Germany, the United States, Canada, the United Kingdom, France, Italy and Japan). This projection is borne out by the latest GDP data, with only South Africa and Egypt posting growth figures below the 4.5% average in 2011. The latter was clearly hampered by the Arab Spring, although Egypt is predicted to post a GDP growth of 5.25% in 2013. Perhaps most impressively, Turkey’s diversified sources of growth, including mining, textiles and electronics, helped its economy to grow by 7.9% in 2011.

Turkey isn’t the only CIVETS market to diversify its economy so as not to be overly reliant on one sector. Colombia, for example, has achieved investment-grade status by varying its export base with textiles, clothing and food processing industries developing alongside its traditional strength in oil. While Indonesia’s flourishing services sector now accounts for the majority of its GDP, by contrast, South Africa, the CIVETS market arguably most reliant on commodities (gold), has shown the slowest growth with a 3.1% GDP rise in 2011.

Although geographically dispersed, CIVETS markets are all well placed to become ripe targets for foreign investment. Indonesia, with all its commodities sources, is conveniently close to BRIC neighbors China and India. Vietnam is even closer, and its coastal position and cheap labor costs will attract many global businesses to relocate manufacturing to its shores.

The Suez Canal has always been Egypt’s biggest geostrategic asset and its fast-growing ports on the Mediterranean and Red Sea are becoming increasingly important trade hubs connecting Europe and Africa. Similarly, Turkey’s position between Europe and Asia, and its potential to provide an energy corridor to Asian oil and gas fields, will ensure the West continues to court it. While located at the foot of Africa along a major shipping route, South Africa has always allowed investors a path into the world’s second-largest continent — little wonder the Rainbow Nation has become Africa’s most successful economy. 

According to Ward, the “political baseline looks supportive” and “all of CIVETS have a good chance of remaining stable.” With one obvious exception, this appears to be the case.

Colombia’s pro-business government has done much to bring the drug cartels and parliamentary groups under control. Despite a long history of political instability, corruption and civil unrest, recent major reforms in Indonesia have helped to move the nation in a positive direction. Vietnam’s centralized, communist command offers at least near-term political stability and Turkey is one of the few stable democracies in the Middle East. As for South Africa, a progressive constitution and successful national elections since the end of apartheid have secured its peaceful transition to democracy.

The jury is still out on Egypt. If political stability is the key to investor confidence, then the revolution has certainly put the country’s previously steady economic growth at risk. But following presidential elections, many argue that the basic fundamentals that make it a fast-growing economy will still be there. The key geographic location, the oil and gas deposits, and the projected increase in consumer spending could all help to make the fallout of the uprising less detrimental than in other Arab Spring countries.

With political stability comes investment in infrastructure. Many of CIVETS governments have introduced projects aimed at improving transport systems and thus business conditions. KPMG’s 2010 Doing Business in Colombia guide states: “Since 1991’s Constitution, Colombian infrastructure has seen a significant improvement due to the fact that the private sector can participate through direct provision of services.” Indonesia has taken this policy a step further by launching the Public Private Partnership, which offers opportunities for foreign investment in the country’s infrastructure sector.

Regulatory environments have im-
proved too. “The Turkish legal framework offers a level playing field to foreign investors and domestic companies,” reports PricewaterhouseCoopers (PwC) and HSBC’s 2010 Doing Business in Turkey. Crucially, under the country’s 2003 Foreign Direct Investment Law, foreign investors may freely start up businesses in company, branch office or liaison office forms. The Socialist Republic of Vietnam is also issuing investor-friendly legislative measures. According to PwC and HSBC, these liberalizing changes combined with Vietnam’s accession to the World Trade Organization in 2007 have “significantly paved the way for foreign investment.”

Perhaps the most profound similarity between CIVETS, however, is their untapped potential as digital markets. And it’s here that the statistics are most striking.

Internet penetration rates (IPR) in CIVETS remain well below those of the G7. Approximately 80% of the UK and US populations are online, compared with 56% of Colombia’s 45 million population, 22% of Indonesia’s 245 million, 34% of Vietnam’s 91 million, 26% of Egypt’s 82 million, 46% of Turkey’s 79 million and 14% of South Africa’s 49 million population.

But the IPR figures belie CIVETS’ engagement and investment in the new digital world. Egypt, for example, is planning a $1 billion upgrade to its broadband capabilities over the next five years, which will quadruple internet penetration. KPMG’s Doing Business in Colombia states that the country improved 14 places in the World Economic Forum’s Global Competitiveness Report for 2009-2010 as a result of its technological readiness. The report looked at factors such as the availability of the latest technologies and internet and mobile phone use in Colombia. Elsewhere, Turkey is one of the major players in mobile technologies, pioneering the development of mobile banking and cashless payments, and Indonesia is Facebook’s second largest market.

With all this in mind, there are clearly enormous opportunities for digital investment in CIVETS. As the United States and United Kingdom reach web saturation, internet use will grow exponentially in these six markets. Crucially, their young, tech-savvy populations will not only drive this innovation, but become some of the world’s most active online consumers.


The early investors

Before assessing the localization challenges that face companies entering CIVETS, let’s first look at some global brands that have already invested in these markets. Which of the commonalities above have been exploited, and what patterns emerge from these investment strategies?

In March 2012, Google launched its first office in Indonesia. “Our presence in Indonesia affirms Google’s commitment to bringing ourselves closer to the users,” said Rudy Ramawy, head of Google Indonesia, at the opening in South Jakarta. Ramawy isn’t the only one with location on the brain. As well as having 35 million Facebook subscribers, Indonesia has the largest number of foursquare users in Southeast Asia. Not to mention the world’s fourth largest Twitter user base. Google has recognized that Indonesia’s high engagement on social networks will soon be reflected in an increased IPR, and clearly wants to mold the country’s digital generation as it develops. Specifically, Ramawy has his sights set on targeting the country’s 50 million small businesses, which will be the “engine of growth for the future economy” and, presumably, an engine of revenue for Google AdWords.

If Google has exploited Indonesia’s potential for digital growth, then Gap, Diageo and Electrolux have invested in CIVETS demographic growth, most notably the emergence of middle classes. Gap opened two South African stores earlier this year, and at the same time closed outlets in North America. “The next big market for us is Africa. There is an emerging middle class and more and more tourism here,” said Gap’s head of franchise. The clothing chain now has plans to expand into Colombia having also opened its first store in Egypt in 2011. Which is where household appliances manufacturer, Electrolux, has focused its energies. Attracted by a young population aspiring to better standards of living, the company acquired Egypt’s leading household appliances manufacturer, Olympic Group, in September 2011. Apparently unfazed by the Egyptian uprising months before, Electrolux closed a deal worth $328 million to secure a solid base for manufacturing in the country.

Diageo has also moved quickly to cater to Turkey’s growing middle class. The British drinks producer bought the Turkish spirit brand Mey Icki in February 2011 and, no doubt inspired by success in China, plans to use this foothold to export Scotch whisky to its new market.

Other CIVETS investors have been drawn to the commodities and cheap labor forces. In 2010, global oil trader Mercuria took advantage of Colombia’s investment-friendly policies to open a trading office in the country’s capital, Bogotá. In January, Shin-Etsu, Japan’s largest chemical producer, announced plans to set up two silicone manufacturing companies in Vietnam. According to the group, the country has an excellent workforce with a high level of education and diligent national character. Many other manufacturers would seem to agree, as the sector now constitutes 40% of Vietnam’s economy.


Localization challenges

From the linguistic to the cultural and technical, early investors will face countless localization challenges in CIVETS. In order to combat such challenges, companies must thoroughly research all locale-specific requirements of these markets, the most pressing of which are outlined below.

Assuming that potential investors do their due diligence in terms of assessing the market opportunity for their product or service, the next step is understanding the cultural challenges. Needless to say, these vary greatly between the six countries, and brand strategies must be localized for these individual markets. Here are a few of the decisive cultural factors, influenced not least by the prevalence of Islam.

Indonesia is the world’s largest Islamic nation, and consequently Islam has a huge impact on both consumer and business culture. PwC and HSBC’s 2010 Doing Business in Indonesia states that the country’s constitution guarantees the right to freedom of religion, but the government only recognizes six faiths, and Islam is practiced by 86.1% of the population. With this staggering figure in mind, it’s hardly surprising that the guide picks out Islamic banking (banking activity consistent with the Islamic moral code of Sharia law) as a “potential growth sector” in Indonesia.

Islam also infiltrates all levels of society in Turkey, despite the country’s secular constitution. The philosophy of the religion provides a value system for personal life, public behavior and business etiquette. Similarly in Egypt, truth and problem solving are governed by the interpretation of Islamic law.

South Africa’s complex cultural diversity also poses localization challenges for investors. The Rainbow Nation’s history of colonization and immigration has created an eclectic population, the myriad communities of which often require radically different approaches. For example, when targeting an audience from an Afrikaaner background, companies should be forthright and direct with their communications. By contrast, care should be taken to ensure that materials aimed at English-speaking South Africans are sensitive to their more reserved and conservative manner.

Arguably the biggest linguistic challenges posed by CIVETS come from Indonesia, Egypt and South Africa. Bahasa Indonesian is Indonesia’s official language and, due to the country’s size, is one of the most widely spoken languages in the world. The Indonesian variety of Malay borrows from other languages and has absorbed much of its vocabulary from foreign sources. Many Dutch loan words have been retained despite the archipelago’s gaining of independence from The Netherlands in 1949. Consequently, it’s a language full of synonyms. For example, Bahasa Indonesian has three words for book, all with slightly different meanings. Communication materials must be sensitive to this nuanced vocabulary. 

With Egyptian Arabic come all the technical challenges of a right-to-left script. With increased global awareness of the importance of online Arabic content, investors in this market will need to produce more and more localized web content with customized page layouts and user interfaces.

Investors have a choice of 11 official languages when localizing content for the South African market. The country’s progressive constitution of 1996 recognizes English, Afrikaans, Zulu, Xhosa, Northern Sotho, Southern Sotho, Setswana, Ndebele, Swati, Tsonga and Venda. Hence, official government publications must appear in all 11 languages, or in six on a rotational basis. What seems like a cumbersome policy is in fact logical, as the limited geographical distribution of each language means that no one language can dominate. English is the language of business, politics and media but only the fifth most spoken language in South Africa. Whereas Zulu, the most common language and mother tongue of 23% of the country’s population, is extremely regional, having a negligible presence in six of South Africa’s nine provinces.

The linguistic challenge, then, depends on the product or service investors are selling to this market. PwC, for example, will have a much easier time localizing English business communications for South Africa than a consumer goods specialist like Procter & Gamble.

While we may debate about pundits’ predictions, not least with regard to Egypt’s future, the drift of Robert Ward’s argument is undeniable. In 2001, the BRICs was a theory; now these powerful engines of economic growth account for nearly 25% of global GDP. “My only regret on the first BRICs analysis is that we weren’t bolder,” wrote O’Neill in 2011.

As the second tier of rapidly-developing nations, CIVETS look set to accelerate this shift of the global economy to the East and South. Strategically located, politically stable and with young, increasing populations, these six countries are more than attractive investment markets. The presence of half of the group (Indonesia, South Africa and Turkey) in the world summit of 20 major economies alone indicates that CIVETS will soon be strategic players in global governance. Equally profound is the enormous online potential of these economies in the new digital world.

The challenge for the localization industry is to embrace these developments. The rise of emerging economies represents a huge opportunity to support our clients linguistically, culturally and technically as they enter new, foreign markets. Not that this opportunity comes without its challenges for North American and European vendors.