As the developed world stagnates and shows little sign of rapid recovery, it is clear that an increasing number of Multi National Corporations will be looking harder at emerging and developing markets for the growth that shareholders look for. So, what does the future hold for big brands in this brave new world?
Mainstream business books are full of illustrations; logistics and supply chain performance is a major part of any firms competitive advantage. This means the effective and efficient combination of all the flows (physical movement; information and cash) AND available local infrastructure are key to sustainable growth. However, in many of these high growth frontier markets infrastructure is NOT a given and many business models will have to adapt to a less than homogenous operating environment.
Marketeers have been licking their lips on the opportunities that are opening up in populous emerging and developing markets and many companies are cherry picking urban markets as opposed to the harder to reach rural areas. This approach may well be flawed and risks may be higher than a headcount analysis can determine. After all, those with discretionary spending power still live in congested places and rural areas remain more than 60 per cent of the market in many consumer categories in many emerging and developing markets.
The BRIC (Brazil, Russia, India and China) and Second Eleven (Mexico; South Africa; Indonesia; Vietnam; Malaysia …) economies are experiencing high growth and, rapid urban expansion. And yet, under investment on infrastructure and the reality of urban congestion is becoming a real brake on sustainable growth. China is experiencing significant wage hikes in coastal regions: 15 to 20 per cent year on year is common in Guangdong, the engine room of Chinese manufacturing. So, several Chinese companies have started to look overseas to increase their capacity. For example, Bangladesh is attractive – wages are 30 per cent lower than in Shenzen; people will work 48 hours which is more than the statutory 40 hour week in China and the government is offering a 10 year tax holiday. And yet, traffic congestion is appalling, electricity black outs are so frequent that companies have to invest in alternative generator sources and logistics resources are there to be built. This position is similar throughout India and Africa where clusters of support services and skilled labour just do not exist. Take Special Economic Zones in India again. It depends where they are – whether the connecting infrastructure essential to market access and the skilled labour pool or training policies are in place to ensure viability.
This past summer, I was working in Andra Pradesh and Tamil Nadu; we were looking at Coimbatore, the Manchester of South India – so called because of its large textile industry fed by the surrounding cotton fields. Success has acted as a magnet for rural migrants and the population has exploded from 816,000 in 1991 to well over 1.7 million by 2011 – a figure that grows still further as we consider the wider agglomeration. It is a story typical of urban areas all over India as the number of Indians living in urban areas has surged to 400 million – about 31 per cent of the population and growing fast. The percentage of people living in cities of more than 1 million was 3 per cent in 1950; it will reach 15.6 per cent in 2025. A recent government report suggests that India will have to spend $950 billion over the next 20 years on urban services including power, water and sewers. Imagine the commercial opportunities opening up for everything from milk to mars bars but, what can be done without maps …
It is one thing estimating what needs to be done and quite another how to do it. In many emerging, developing and now devastated markets – where all of this growth potential exists – few people know what is on the map. There are no up to date maps or plans of any city in India – by the time one is completed, somebody has built an extra room, a floor or even a new building. A lot of what is actually in the built environment should not be legally there in the first place. This is not unique to India. Neither is it unique to the emerging and developing markets. Regional disparities in mature markets are equally damaging. Differences in Italy between Northern (€25k GDP per capita) and Southern (€16k GDP per capita) Regions are chronic and this difference is characterised by a more informal context in the south. With the current economic crisis throughout the EU, youth unemployment and efforts to upskill the workforce have stalled. And then, any effort to explore frontier markets is hampered by local conditions.
We spoke with Rod Stout, CEO of businessmodelling – a South African based supply chain optimisation consultancy with extensive experience in building sales and distribution capacity in the shanty towns like Soweto – and it became plain that many of the retail outlets in shanty towns move constantly; they cannot be fixed by a GPS system without constant adjustment. Rod reminds us: “These areas represent huge sales potential but, they are informal and regular trading conditions just do not hold. Any business has to re-think their approach in these environments and there is no substitute for work on the ground. You can’t do this on a screen and this represents a major culture shock for logistics and supply chain professionals trained in the developed world.” We need to remind ourselves that the informal market worldwide is worth $1 trillion – which is 20 per cent of the size of the China market!
The other issue is the difference between plans and reality. In Indonesia during Yudhoyono’s first five-year term, only 125 kilometers (78 miles) of toll roads were built. In China 4,719 kilometers of expressways were added in 2009 alone. Indonesia aims to build 20,000 kilometers of roads and add 15,000 megawatts of power generation by 2014. Similar claims are made for places like Vietnam but red tape and corruption gets in the way. Just how long local as well as international investor patience can hold in these markets may determine social cohesion and security as well. This is a viscious circle; delivery is becoming the difference – not brochureware.
Recent humanitarian disasters in Queensland, Australia (coal mines and wheat production disrupted) Japan (IT components destroyed) and Thailand (auto components and textiles dislocated) sharpen this perspective – maps are history. What do you do when the entire infrastructure is destroyed? Photographs of the disaster in Japan ask the question – where do you start? More to the point, previous disasters could be dismissed as force majeure, acts of God, and put down to bad luck. Increasingly, shareholders will not accept that excuse as they insist – why didn’t you see this coming? Then, what are you going to do to build it back … better.
The skills required to build back infrastructure are at a premium. Take Canterbury, New Zealand after the recent earthquake. The Canterbury Employment and Skills Board are on a global recruitment drive to attract 30,000 skilled workers needed for construction, engineering and IT roles in Christchurch over the next 10 years. This project is worth well over $20 billion. We can expect a similar recruitment drive to follow all humanitarian disasters – especially those that have played a significant role in global supply chains and this will mean not just building back but building back better – so that supply chain risk is minimised.
That’s infrastructure over the longer term. Again, the skills required to build back the market for all sorts of products will not be those that are taught in conventional business schools. Try building a sales strategy in urban spaces that are so much in flux. The outlets are small and reaching them can be problematic – necessitating a complete rethink on distribution. For example, a move from trucks to manual handling systems. I recall building sales strategies in the transitional economies of Eastern Europe – there were few shops; most of them were informal kiosks and in Russia they had to pay krysha (roof) to the mafia to stay in business.
These environments are frontier markets and there has to be a total re-think in order to cope let alone prosper. It is as if we are moving from the need to understand orchestral music with rigid scores; defined musical roles and responsibilities led by a conductor to the ability to play jazz and improvised music. Logistics and supply chain thinking has to respond to demographic trends and urban congestion with innovative fresh practice. Best practice from the developed world is not the way forward. We need a transformational agenda – especially as shareholders force the Fortune 500 to go where the growth is.