Emerging Markets and the Supply Chain

Stephen DeAngelis

December 19, 2011

Emerging market countries have been on an economic roller coaster over the past couple of years. Analysts continue to insist, however, that the world’s economic future rests on the shoulders of a growing global middle class. According to Edward Tse, Bill Russo, and Ronald Haddock, the “global middle-class market … encompasses a huge customer base.” [“Competing for the Global Middle Class,” Strategy + Business, 23 April 2011] They explain:

“In 2011, it includes about 400 million people in the mature middle classes of the U.S., Europe, and Japan, and another 300 to 500 million people, depending on how the middle class is defined, in emerging economies. (The World Bank defines middle class as people who are above the median poverty line of their own countries. This might make them poor by the standards of Europe or the U.S., but gives them enough purchasing power to become consumers of manufactured goods and services.) This new global middle class is particularly evident in Brazil, China, India, Indonesia, Mexico, Nigeria, Turkey, Vietnam, and other countries with relatively large working populations and rapid economic growth rates.”

Identifying countries with growth potential has become a sport in some circles. As I wrote in a previous post:

“As emerging market countries increase in importance with regards to the global economy, identifying them has become an interesting game of acronyms. First there were the BRIC countries (Brazil, Russia, India and China). They were joined by the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). Then Indonesia got promoted into the BRICI (I suppose that left the C-VETS with new acronym). My guess is that all aspiring emerging market countries want their nation represented by a letter in an acronym because it is an honor that identifies them as an up-and-coming economic powerhouse — a place where investors should look to get a good return on investment.” [Knowing Your BRICs and CIVETS]

CIVETS seem to be getting almost as much attention as BRICs nowadays. “The so-called ‘CIVETS’ countries … are now touted as hot markets because they have diverse economies, fast-growing populations, relatively stable political environments and the potential to produce outsized returns in the future.” [“The New BRICS on the Block: Which Emerging Markets Are Up and Coming?” Knowlege@Wharton, 19 January 2011] The article continues:

“Far-flung geographically and shaped by vastly different cultural, religious and political structures, the CIVETS show the potential to develop rapidly and reward those willing to take on emerging market risk beyond the more-established BRIC countries, experts say. … In a recent survey conducted by Knowledge@Wharton and the global communications firm Fleishman-Hillard, a majority of corporate executives, investors and business leaders indicated that they would be interested in doing business with multinationals in the CIVETS countries. Respondents said they were most attracted to CIVETS because of low labor and production costs and the countries’ growing domestic markets. When asked to identify weaknesses, the survey participants cited political instability, corruption, a lack of transparency and infrastructure, and homegrown companies without much of a reputation or brand identification.”

Supply chain analysts are beginning to recognize that the growing global middle class could significantly affect supply chains in the future. For example, Malory Davies, Editor of Supply Chain Standard, writes, “Just as we all got used to the idea that BRIC is where it is all happening and must figure in any self-respecting supply chain strategy, it turns out that BRIC is now last year’s thing and we must all now refocus on CIVETS.” [“Drop the BRIC, it’s time to focus on the CIVETS,” 28 November 2011] As noted above, even CIVETS might be “last year’s thing.” Davies continues:

“For most organisations, there is still plenty of room to take advantage of the opportunities in the BRIC economies – both as sources of products and as markets. But at the moment, there is no denying that economic globalisation has gone off the boil. In fact, there is clear evidence of a decline in global trade levels. Capgemini’s latest Global Trade Flow Index for the third quarter reveals a fall of 1.3 per cent quarter on quarter. At the same time, local domestic consumption around the world is still growing slowly. Perhaps the emergence of the CIVETS will give the process of globalisation added impetus. It will certainly have an impact of the shape and structure of supply chains in the future.”

That begs the question: “What kind of impact will the global middle class have on the shape and structure of supply chains in the future?” Will Connors reports that one obvious impact will be in the types of products that appeal to global consumers. [“Catering to New Tastes as Incomes Climb,” Wall Street Journal, 10 February 2011] Connors’ article focuses on one commodity that seems to appeal to most middle-class consumers — meat. He discusses how a company called Zambeef is trying to become “Africa’s Coca-Cola for meat.” A taste for meat isn’t the only thing that changes when people find themselves with a little discretionary cash. The difficulty, of course, is that what people want to buy differs dramatically depending on culture and locale. Not only do products have to cater to local tastes they have to adapt to local circumstances. In many homes in emerging market companies, there is little storage room so sizes and quantities can’t be like those found at Costco, Sam’s Club, or BJ’s. That’s why McKinsey & Company analysts Yuval Atsmon, Ari Kertesz, and Ireena Vittal ask, “Is your emerging-market strategy local enough?” [McKinsey Quarterly, April 2011] They write:

“Creating a powerful emerging-market strategy has moved to the top of the growth agendas of many multinational companies, and for good reason: in 15 years’ time, 57 percent of the nearly one billion households with earnings greater than $20,000 a year will live in the developing world. Seven emerging economies—China, India, Brazil, Mexico, Russia, Turkey, and Indonesia—are expected to contribute about 45 percent of global GDP growth in the coming decade. Emerging markets will represent an even larger share of the growth in product categories, such as automobiles, that are highly mature in developed economies. Figures like these create a real sense of urgency among many multinationals, which recognize that they aren’t currently tapping into those growth opportunities with sufficient speed or scale.”

The analysts note that some emerging market countries are so large that “it isn’t enough, as many multinationals do, to develop a country-level strategy.” They insist, “As developing economies become increasingly diverse and competitive, multinationals will need strategic approaches to understand such variance within countries and to concentrate resources on the most promising submarkets—perhaps 20, 30, or 40 different ones within a country.” They conclude:

“There is no one-size-fits-all strategy for capturing consumer growth in emerging markets. What’s clear, though, is that traditional country strategies and other aggregated approaches will miss the mark because they can’t account for the variability and rapid change in these markets. As the battle for the wallet of the emerging-market consumer shifts into higher gear, companies that think about growth opportunities at a more granular level have a better chance of winning.”

Tse, Russo, and Haddock agree that “the world is far from homogeneous.” They write:

“The buying power, needs, and desires of the middle classes vary by nation and region. In developing nations, for example, middle-market customers are seeking products that have some of the premium features and quality that customers in developed nations are used to, but at lower price points. Furthermore, customers in each geographic market are drawn to buy products that fulfill local needs and desires. … To successfully serve middle-market customers, companies must identify which product attributes the customers in a specific market value and don’t value. Then, they must either add those attributes to or cull them from their existing products. [Pankaj Ghemawat, professor of global strategy at IESE Business School,] uses the examples of McDonald’s, KFC, and Coca-Cola, all of which vary their products geographically: Coke, for instance, uses cane sugar as sweetener in some countries and corn syrup in others. This type of variation adds complexity across product and marketing mixes, and in all the operations and functions related to them. It can require much extra expense and attention from companies, especially those with heavily centralized, scale-driven business models.”

If supply chains weren’t complex enough, customizing products to fit local needs and tastes can exponentially increase complexity in sourcing, manufacturing, distributing, and retailing. Tse, Russo, and Haddock note, however, that “companies that seek leadership positions in their industries may have little choice but to pursue the global middle market.” They indicate that companies that believe that “they don’t need to alter [their] products — [they] just need to educate [their] customers” — are naive if not delusional. They suggest a “better alternative is to rethink the value chain entirely.” Stefan Wagstyl concludes, “Multinational companies cannot afford to ignore emerging markets. Nor can they afford to ignore the difficulties involved.” [“Compelling reasons to increase engagement,” Financial Times, 14 April 2011] Marcus Blosch, research vice president with Gartner, claims that “companies are predicting that 40 to 60 percent of their growth in revenues will come from emerging markets over the next decade.” [“The Dynamic Landscape of Emerging Markets,” SupplyChainBrain, 24 October 2011]

 

Undoubtedly, companies will try to remove some supply chain complexity by building plants closer to demand centers and by buying more supplies locally. The greatest risk to this strategy will be local events (natural or manmade) that could severely disrupt both supply and production. It’s clear from the above discussion, however, that these risks are far outweighed by the benefits of tapping into the buying power of the emerging global middle class.