The American Borat

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As some of you may know, I just returned from Kazakhstan, where we adopted our new daughter.  Her name is Magdalena (Maggie for short), she is 10 months old, and is one awesome girl.  We had a very blessed (and very long—6 weeks) trip—not in the sense that life was easy or comfortable, but it was rewarding to spend so much time with her, learning about her culture, and seeing how the other half (of the world) lives.  Even as we were immersed into the Kazakh culture, the analyst in me couldn’t resist making a few observations on how business is done there.  These are of dubious value on their own, but if we allow the power of extrapolation and assume that all up-and-coming 2nd world countries are just like Kazakhstan, then, well, that’s something.  Here’s a completely objective list—no bias toward the core stocks whatsoever—of the global winners and losers for the next century.

 

Cisco—Lots of opportunities for network upgrades.  The internet was not ever used in any of our document filing/processing, nor by any of the government officials.  Everything is done by hand.  In fact, Maggie’s passport was actually driven or flown by someone from one city to another for processing!  The internet seems to be solely for social value and it needs some initial momentum to boost corporate use.  When it does, it should definitely have sticking power, because there is a strong drive for conformity here.  The only problem is pirated competing technologies from China and Russia.  CSCO is already here—I saw their office in the same building as the U.S. Consulate.

 

Vodafone/Nokia—Cell phone usage already widespread, if not ubiquitous.  Could follow the Far East toward more broadband/3G use eventually, given the obvious stability and endurance of the cell phone here as a future consumer and business platform.

 

Intel/Microsoft—Not many computers, and most we saw were used for document storage (literally—piles of paper on top of them, not electronic storage).  New PC buy and upgrade cycles will happen only when networking/internet use becomes more status quo.

 

P & G—Best brand power in Kazakhstan.  Many P&G brands are widely available—Tide, a renamed version of Downy, Pringles, and especially Pampers.  In fact, even though Huggies are also available here, diapers are actually called Pampers!  For a product category to be renamed a single brand (i.e. Kleenex, Chap Stick) is the pinnacle of achievement in branding.  We repeatedly heard the term “Pampers” coming from Kazakhs, Russians, and English speakers alike.

 

Coke/Pepsi—Coke is widely available in grocery stores and restaurants, though not widely consumed.  This is a tea drinking country.  Coke Light and Sprite also widely available.  Pepsi less available.  No vending machines.  Kudos to Coke’s bottler for getting widespread distribution.  Have not seen any mass marketing.  Bottom line, it’s not a surprise that Coke’s distribution is already set up here, but there is still upside in terms of consumption.

 

Altria—Smokes are dirt cheap over here!  A pack of Marlboros for $0.60!!!  And they are the highest-priced smokes, which range down to $0.16 per pack.  Consumption is already high, especially in our apartment building, and the low prices can only serve to invite greater tax levies, if the developed world is a model for the developing world (which it usually is).  I would assume that the government powers, who very much want to court the developed world, in particularly the English-speaking world, will not be long in discouraging smoking for clean-air reasons too.  It certainly doesn’t help smokers’ cause when neighboring Turkmenistan’s authoritarian president just died today due to heart failure, reportedly brought on by too much smoking.

 

McDonald’s—Nowhere here (expansion potential still exists).  Locals are interested in American things, in particular our entertainment (insert derisive comment about American entertainment here).  And they eat a hodgepodge of global food anyway, so MCD could easily find a place here.  I’m not sure why MCD isn’t already here, come to think of it.  There was a very subpar Burger King knockoff in Almaty doing decent business.

 

Wal-Mart—Kazakhstan retail is like U.S. retail two generations ago—crying out for massive efficiency improvements.  Prices are written on stickers and stuck on every product, then typed in at the cash register.  The “supermarkets” are about 4,000 sq ft, slightly larger than our convenience stores.  Not that Wal-Mart has any designs on Kazakhstan any time soon, but they would have some mean competition from the bazaars, which are like a mall of a thousand tiny kiosks, mostly outdoors, selling product on the cheap.  WAG would also revolutionize the pharmacy biz, but that’s at least 50 years down the road.

 

Financials—The wealth management business scarcely exists.  Many middle-class, upwardly mobile Kazakhstanis do their saving at home, rather than in banks.  Banks seem to exist primarily to change money between the tenge (domestic currency), US dollars, and rubles.  FYI to all dollar bashers:  the euro can’t even be found at most currency exchanges.  Global investment banks have likely found a long-term home here for corporate transactions.

 

AIG—Given its relationship with China, AIG could make inroads here.  Insurance is very likely to be a growth industry here as wealth grows; in particular, life insurance can be a store of value, and it’s an investment that can be of any size.  Families are close, and banks are viewed suspiciously, so insurance already has a leg up.  In preparing for our court petition, it was suggested to us that we tell the judge we have life insurance, which would let him know that our adopted child has some security.

 

Abbott—Most babies are fed kefir, a yogurt-like beverage that supposedly has many of the beneficial qualities as formula, but is far less convenient (it only lasts 1 day).  As wealth grows, and if ties to the West continue to expand, formula use should also grow.

 

Schlumberger—Obviously, the country is tethering its future to energy.  The government owns much of its resources, but has often brought in Western oil companies to develop its largest, and most technologically complicated, oil fields in the Caspian Sea.  The Kashagan field is possibly the 2nd largest in the world.  Now that oil prices are high, the government is not likely to sell off any more stakes, just as it is with most of the developing world.  This limits opportunities for the oil majors.  But Kazakhstan is progressive and greedy enough that they want only the best exploration equipment, and are likely to dramatically increase their oilfield spending via reinvesting their growing oil cash flows (virtuous cycle), which plays right into SLB’s hands.

 

GE—As a rapidly industrializing country, Kazakhstan bears loads of opportunity for GE.  Major infrastructure needs here fit into GE’s product lineup—power plants, aircraft (ask me about our domestic flight from Almaty to Semey), oil production, processing, and transportation equipment, electrical equipment (pretty shaky transmission—we tripped our apartment’s power just about every night), appliances, and maybe medical technology.  GE’s massive investment in China for manufacturing is also a geographic plus.

 

Franklin—Kazakhstan could benefit from FELE’s water pump technologies (ask me about my experiences with Stalin’s revenge).  But there is a question about the country’s willingness to pay up for superior reliability, rather than buying something cheaper with the same functionality in the short-term.  Fuel pumps also represent opportunity for FELE; emissions controls would be a catalyst for FELE’s fuel pump business.

 

Emerson/United Tech—Emerson’s products are in a sweet spot for the developing world—upgrading the power grid, upgrading industrial automation, upgrading network equipment, upgrading process controls, and more central air systems.  Same for UTX, with infrastructure upgrades benefiting Carrier (central air), Otis (elevators for all the new skyscrapers being built in Astana and Almaty), fire and security protection (same), and Pratt (aircraft).

 

Bottom line

Based on first-hand, real-time global due diligence in an emerging 2nd world country in the Eastern Hemisphere, following is a list of who stands to be the biggest winners from the economic renaissance and globalization of Central Asia and other developing countries/regions.

 

Biggest winners, short-term:  EMR, UTX, SLB.

Biggest winner, medium-term:  CSCO, PG, GE.

Biggest winner, long-term:  AIG.

 

By John Meyer

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