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When the BRICs crumble

Brics 2012 6 1
Heads of the BRICS countries (L to R) President Dilma Rousseff of Brazil, Russian President Dimitry Medvedev, Indian Prime Minister Manmohan Singh, Chinese President Hu Jintao and President Jacob Zuma of South Africa pose prior to the BRICS summit in New Delhi on March 29, 2012. (PRAKASH SINGH/AFP/Getty Images)

When the BRICs crumble

Eight strategies for managing investments in the much-hyped, now-teetering big emerging markets.

PARIS, France – When Goldman Sachs economist Jim O’Neill came up with the BRICs concept in 2001, it served as shorthand for a group of economies that deserved special attention even if they weren’t quite ready to join South Korea and Mexico as new entrants to the OECD group of developed economies.

But in one important sense, it represented pure concoction: Except that they were big and interesting, these countries had almost nothing whatsoever in common.

“The BRIC group was never meant to be a ‘club’,” recalled Jim Wygand, partner at the São Paulo-based consultancy Critical Corporate Issues (CCI).

Yet the fortuitous acronym had legs. It called attention to places that deserved to be watched. And it caught the imagination of international investors.

Lo and behold, fund managers began to set up special investment vehicles for the otherwise disparate contingent of Brazil, Russia, India and China. Global companies started talking about their BRIC strategies. Foreign direct investment (FDI) zoomed alongside portfolio cash. The management consultancy Arthur D. Little began differentiating between corporations with a 2.0 BRIC strategy and those still mired in the backwaters of 1.0.

When the BRICs successfully weathered the 2008 downturn, they really grabbed the world’s attention.

Things moved more slowly on the political side. After all, these countries had never been great friends beforehand. But eventually leaders of the four scattered nations caught the wave. In the image of the G8, they started having their own exclusive summits. In 2011, they decided to go plural, inviting an “S” in the figure of South Africa. A year later, there was talk that they might “save Europe” with a bailout.

More from GlobalPost: How real are the BRICS? Goldman-Sachs says 40% of world GDP real (by 2050)

Given their huge populations, much is made of the sheer weight of China and India. But even relatively small Brazil (population under 200 million) is setting new records for FDI. Major multinationals like Banco Santander have jumped in head first. The biggest lender among Spanish banks, Santander makes more money today in Brazil than in any of the other three dozen countries in which it operates: one-quarter of its earnings come from the Latin American nation. (Lately, rumors have suggested that Santander, hobbled by the crisis back home, is negotiating to sell Brazilian assets; the company denies this.)

No wonder, then, that we see hand wringing as BRIC growth begins to stall. Brazil and India are now slashing interest rates in an attempt to clamber back to previous plateaus. And in China, the debate isn’t so much about whether there will be a downturn as whether the landing will be soft or hard.

So if you run a global company that has carefully built a BRIC strategy, what do you do now?

We polled the experts.

Tip 1: Abandon that BRIC strategy but not necessarily all of the BRICs; Focus on the places that really make sense for your company

In Wygand’s view, “CEOs should simply look at each of the BRICs and choose to invest on the merits of each. There is neither need nor justification for a BRIC-specific strategy. You don’t need to be in Russia because you are in Brazil, or in China because you are investing in India.”

“In good times, companies can get away with being unfocused and sloppy,” says Ravi Ramamurti, CBA distinguished professor of International Business & Strategy and director of the Center for Emerging Markets at Northeastern University. “The ‘plant-the-flag’ approach to internationalization may seem good enough. The slowdown provides the impetus to do the homework and focus the portfolio on the most promising emerging economies. For example, Russia may not belong in your portfolio, even though it’s a BRIC, but Turkey or Indonesia might. Do the analysis, looking at the potential for top-line and bottom-line growth.”

Notes Beni Lopez, Chief Globalization Officer (CGO) of Softtek, a global IT firm: “The growth seen in the economies of Brazil, India, China and Russia has been fueled by direct foreign investment and also the boom in demand for some of their natural resources (oil, natural gas, agricultural products). However, it is also important to realize that each one of these countries is completely different from the other. Thus, all four or five countries cannot be measured by one metric or