May 14, 2007

Emerging markets taking more action to manage pressure from raw material, energy costs, environmental issues

Emerging markets are doing more than more established economies to manage growing pressure associated with environmental issues and the cost of energy and raw materials, as indicated by the latest Grant Thornton International Business Report (IBR). This year's annual survey polled 7,200 privately held companies in 32 countries, representing 81% of the world's Gross Domestic Product (GDP).

Raw material costs dominate the list of worries for firms worldwide, with 44% of the surveyed firms saying they expect these to have a major impact on cost pressures in the next twelve months. This was followed by 41% who were concerned about staff costs, 37% about energy costs and 34% about transport costs. Only 15% said they expected property costs to have a significant impact over the coming year.

Energy costs appear to be affecting Europe more than the rest of the world, with nearly (or more than) half of companies in five of the region's top ten countries citing energy as having a major impact on cost pressures: Germany (58%), Ireland (47%) and France, Luxembourg and Italy (all 44%). Globally, companies in the Philippines (68%) reported themselves as likely to be most affected by energy cost pressures, followed by Botswana (65%). In contrast, only 35% of firms in Canada 35%, 32% of U.S. firms and 40% of U.K. companies anticipated energy cost impacts. Companies in Australia (18%) said they are least likely to be affected by the cost of energy.

At the same time, companies from every continent indicated substantial concern about the forthcoming impacts of raw material costs. Businesses in Spain (61%) expect to be most affected by the cost of raw materials, followed by Botswana and Singapore (both 60%), and Thailand and France (both 56%). The impact of raw material costs will be least felt by businesses in the Netherlands (29%), followed by the U.S., U.K. and Sweden (all at 31%), and Canada (34%).

In light of these expectations, the survey found that companies in the emerging markets have done the most to date to manage future energy cost pressures. The surveyed companies were asked whether they had undertaken six specific energy and environmental initiatives. These included: conducting an energy use audit; reducing energy consumption; putting measures in place to turn off electrical equipment; investing in energy-saving equipment; investigating alternative fuel/energy supplies; and considering relocation of operations to reduce transportation costs.

A top score of 100 was assigned to each initiative, for a maximum overall score of 600. On this basis, companies in the Philippines led the way with a score of 410, followed by: Brazil (360), mainland China (341), Malaysia (307), Germany (306), Turkey (303), Poland (298), Hong Kong (292), Mexico (283) and India (282). Canada and Australia were tied, each with a score of 233, and were ahead of the U.S. (229) but behind the U.K. (258)

Details of the main actions taken by companies to reduce energy cost pressures illustrate even more clearly the trend among emerging markets:

*58% of businesses worldwide reported having undertaken an energy review to determine how they may be wasting energy, led by companies in the Philippines (83%).

*59% of businesses have reduced their energy consumption, again led by the Philippines (85%).

*60% of businesses said they have put in place measures to ensure that all computers and electrical equipment are turned off, with Malaysian companies leading in this area (85%). The least action taken was by businesses in Thailand (16%) and Sweden (39%).

*44% of businesses have spent most on energy-saving equipment with Brazilian businesses (66%) the most likely to invest.

*20% of businesses have invested in alternative fuel/energy supplies. European businesses are more likely to have invested in these (24%).

*22% of businesses have considered relocating to reduce transportation costs with companies in mainland China (46%) most likely to have contemplated this.

"Unless environmental factors such as energy and raw material costs become issues that significantly affect a company's profitability there is no incentive for it to take action, and reduce its impact on the environment. There must be motivation to take action on raw material and energy costs or companies will continue to focus on other cost pressures such as salaries and wages," said Alex MacBeath, global leader of privately held business services for Grant Thornton International.

"We are now at a tipping point in looking at climate change and environmental management. It is time businesses recognized the fact that unless they take action to reduce their impact on the environment, it will harm their long-term competitiveness," he continued, adding, "There is also a role for national governments to look at the long-term competitiveness of their economies and factor energy and raw material costs into that equation.

"Unless they take action to actively encourage businesses to invest for the future and reduce their impact on the environment, they will ultimately damage their economies," MacBeath concluded.

The IBR grew out of a project called the European Business Survey (EBS), begun by Grant Thornton International in 1992. The poll went international in 2003 and was renamed the International Business Owners Survey (IBOS). It underwent another name change, to the International Business Report (IBR), in 2007.

The IBR survey draws upon 15 years of trend data for original EBS participants and five years for original IBOS countries. Fifteen-year trend data exist for France, Germany, Greece, Ireland, Italy, the Netherlands, Poland, Spain, Sweden, Turkey and the U.K., while five-year trend data are available for Australia, Canada, Hong Kong, India, Japan, Mexico, Singapore, South Africa and the U.S.

Grant Thornton International is an umbrella organization representing independently owned and managed accounting and consulting firms around the world. It has Canadian affiliates in Montreal, Toronto, Calgary and Vancouver. The group is donating $5.00 (U.S.) to UNICEF for every completed IBR questionnaire-for a total of over $35,000 (U.S.) in 2007. More information is available on-line at www.internationalbusinessreport.com.

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