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Globalizing through privatization.

The worldwide trend toward privatization offers a unique window of opportunity for U.S. companies to expand their international reach.

Globalization is the major challenge and opportunity for companies in the next decade. But what is a truly globalized company? It's not one that simply has international operations. Nor is it one that has entire divisions or business units overseas. And it's not one that has heavy export ratios.

In order for a company to be truly global, it must replicate its entire business system in various locations around the world and optimize its total business structure by adopting a global model of operation, where each function is sited in the most appropriate location.

Statistics show that, on average, globalized companies have a world market share about 60% greater than that of international companies, and more than three times greater than companies that solely export. Equally important, there is a strong correlation between increased market share abroad and increased market share at home. A survey of CEOs indicates that, on average, globally operating companies have a domestic market share 80% greater than that of international companies, and two-and-a-half times greater than export-only companies.

Realizing the global potential of a business is as much a process as an objective, for it is clear that globalization is more a journey than a destination. The rationale for that journey is to build value through profitable growth. Companies that intend to globalize must make fundamental changes in their organizations and operations in order to overcome barriers that would otherwise limit such growth.

The global growth path is typically long and challenging. Profits will go down before they go up, due to the considerable start-up costs to initially build an export network and replicate the business system worldwide. Large investment outlays are required for building plants or sales organizations and acquiring and integrating local companies.

In addition to following this traditional road to globalization, the worldwide trend toward privatization offers a unique window of opportunity for U.S. companies to expand their international reach. As one would imagine, U.S. companies have the best potential to tap into the privatization pipeline in nations where the institutional framework for private enterprise is already in place. Conversely, it is a much bigger challenge in countries that have yet to legalize private property ownership.

Approaches to Privatization

Rationales for and approaches to privatization are surprisingly similar in nations of vastly different cultures and economies. For many government leaders, privatization seems a surefire way to "improve efficiency" and "double production." They commonly speak of "revitalizing the economy" while "avoiding excess foreign or domestic debt." They often see the sale of state-owned enterprises as a means to "promote the virtues of competitive private enterprise over those of the state."

Whatever the impetus, privatization offers U.S. companies an unmatched opportunity to break into new markets, with strong support from local governments. Privatization practices that have been attempted (not all succeed) range from complete outright sales to conditional partial transfers, from private business transactions to public auctions, from fastpaced deals to seemingly endless processes.

One message that has come through from all these privatization efforts - whether successful or not - is that the process is highly complex and that winning solutions require extensive experience, in-depth industry knowledge, and highly developed privatization skills.

Throughout the world, the first targets for privatization are typically companies that operate under highly regulated, monopolistic environments, such as telecommunications or utilities companies. Extractive industries, including oil and mining, usually come next. Other suitable targets are capital goods and manufacturing operations, especially the steel industry.

High-potential Undertakings

Financial services institutions, which can be set up by or sold to private investors, are also high-potential undertakings for U.S. companies. In addition, transportation-related ventures such as airlines, railroads, highways, bridges and ports, along with municipal services such as waste management and water supply, are increasingly being sold, franchised, or contracted out.

The movement from state to private ownership began in the United Kingdom in the early 1980s. Other Western European countries soon followed suit. Germany is one of the most proactive nations in terms of privatization. It is well into a massive effort to privatize the former East German state-owned enterprises and is considering privatizing its own telecommunications, airlines, and roads. France, Italy, Spain, and Portugal are also prominent players. More recently, the Scandinavian countries also have begun exploring privatization.

A Special Expertise

In Eastern Europe, where dynamic privatization activity is now taking place, emphasis is being placed on the process and institutional frameworks for voucher systems, private sales, auctions, and other mechanics that are generally implemented by a privatization agency or ministry. Working with these agencies demands a special expertise. Poland, Hungary, and Czechoslovakia all have aggressive plans for energizing and revitalizing their economies through free-market policies, and officials are keeping an open mind to ideas from the West.

Latin American countries, after decades of crisis, have found a path toward economic stability and growth. Chile's nearly completed privatization program shows impressive economic success, and there are still some opportunities there. Mexico has privatized a number of high-profile companies, including mining, telecommunications, and energy-related businesses, and has received worldwide recognition for the successful privatization of its commercial banking industry. Brazil is proceeding with its privatization initiative, despite some political opposition, while Venezuela, Uruguay, and Colombia recently announced their own privatization programs.

In the Asia-Pacific arena, the governments of New Zealand and Malaysia have sold telecommunications, energy, and manufacturing interests. Other privatization initiatives are being finalized, including some in telecommunications and railways in Japan. Government officials in the Philippines, Pakistan, and India also are considering some type of privatization activity.

What the Future Holds

We can expect a decade of continuing activity in privatization. Most likely, initiatives will continue to make steady progress in Western Europe as the private sector continues to grow.

In the short term, Germany and probably most of the Latin American countries will transfer the bulk of targeted companies to the private sector, providing many opportunities for U.S. companies. In the mid term, Eastern Europe will set up the basic framework for privatization and could generate the most transactions, although Asia-pacific and some African and Middle Eastern countries could also be quite active. Privatization should continue to progress in the Commonwealth of Independent States as well.

The potential for private enterprise to expand its role in privatization around the world is as enormous as it is unpredictable. And, in reality, such an expanded role is inevitable. Me incentives for privatization have already been woven into the economic and political fabric of the global marketplace.

Martin Waldenstrom is President of Worldwide Management Consulting at Booz-Allen & Hamilton Inc. He is a member of the firm's Board of Directors and Executive Committee, and Chairman of Booz-Allen Acquisition Services, which conducts Booz-Allen's activities in acquisitions, divestitures, and joint ventures. Serving clients worldwide from Paris, Waldenstrom has particular expertise in the design and implementation of cross-broader transactions and alliances. Prior to joining Booz-Allen in 1980, he was employed in Paris and London by the Boston Consulting Group.
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Author:Waldenstrom, Martin
Publication:Directors & Boards
Date:Jan 1, 1993
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