Emerging Markets Experience Growing Pains

Report Shows Growth is Back, but Faces Unique Challenges

By Joe Feeley

I tend to look for good economic news. It often gets crowded out of the family picture by any given trend measurement that makes for a better media moment, particularly when it's headed in the wrong direction.

Our overall confidence to spend, invest and take a few risks is accompanied by a nagging worry about the next shoe that will drop. For a very long time now, maybe since Y2K, 9/11 and other 20xx business debacles, there's been constant nervousness about a big shoe looming out there somewhere.

Lately, it's been Europe's economic soap opera pushing and pulling the good economic/bad economic outlook meter seemingly every day. The serious problems there to fix, and the drumbeat of a slowing Chinese economy, are issues not to be taken lightly.

But fear of recession has been and again can be self-fulfilling prophecy, so ferreting out good news is a worthwhile task.

I recently received a report about the spending state of mind of manufacturers that buy or upgrade your machines.

There are encouraging, albeit challenging, signs in the capital spending outlook. Capital spending took a break during 2008-2009, but A.T. Kearney's Excellence in Capital Projects Report finds growth is back and at record levels. Capital project spending is $11 trillion–$12 trillion annually, with growth of 10% or more expected during the next few years.

According to the study, capital project management is pretty lousy. Three out of five are over budget, and seven out of 10 are behind schedule. The report concludes that these missed deadlines and blown budgets mean many capital projects are barely economically viable.

So, expect even more pressure on cost and time to market from potential equipment customers.

Among the factors the report identifies as big influences are geography and technology.

Emerging markets are seeing more capital activity thanks to economic growth and cost arbitrage. Three in four companies in the study have or plan to start capital projects in emerging markets. The report reminds us that emerging markets have many positives, but they present unique challenges that include immature supply chains, high sovereign and regulatory risks, and skill shortages.

"Technology is changing at breakneck speed across the world, and strong competition is pushing companies to innovate and reduce time to market," write report authors John Pearce and John Wolff. "As a result, companies are investing more in unproven technologies, which increases the risk of the unknown. According to our study, 76% of capex spending is 'new' or 'first ever.'"

Your takeaway: Technology scares a lot of these companies. You might expect to do more hand-holding.