China recently announced that its goal for economic growth for the coming year is 7.5 percent. [“China sets 7.5% growth target,” by Lucy Hornby, Tom Mitchell, and Simon Rabinovitch, Financial Times, 5 March 2014] That’s a healthy number, but far below the double-digit growth that China experienced before the Great Recession. Hornby, Mitchell, and Rabinovitch indicate that China might be pressed even to meet this more modest number. China is not alone among emerging market countries in this slowdown; but, the slowdown starts with China. Ever since China emerged as an economic powerhouse, investors have been saying, “If China sneezes, the world catches a cold.”
Last summer Joshua Goodman and Matthew Malinowski reported, “For years developing countries have been thrice blessed. First, near-zero interest rates in the U.S. drove investors into bourses from Mumbai to Mexico as they searched for higher returns. Next, China emerged as the trading partner of choice as it gobbled up Indonesian palm oil, Cambodian hardwoods, and Brazilian iron ore. Finally, with the exception of the Middle East, the politics of most emerging-market countries were stable. The blessings have run out.” [“Why Emerging Markets Are Getting Crushed,” Bloomberg BusinessWeek, 1 August 2013] They note that turmoil has once again returned to places like Egypt, Brazil, and Turkey. They go on to note that “China, India, Russia, Argentina, and Venezuela … face the risk of civil unrest in the short to medium term. The middle classes spawned in these countries since 2000 are frustrated with corruption.” Russian involvement in the unrest in Ukraine is also likely to result in economic consequences. Even so, China’s economy is going to have the most significant impact on the global economy. Goodman and Malinowski write, “[The] slowdown in China [is] affecting exports, from coal to copper to potash.” As Michael Pettis, a finance professor at Peking University’s Guanghua School of Management and a senior associate at the Carnegie Endowment for International Peace, states, “The potential costs and benefits of rebalancing the world’s second-largest economy are high and will affect industries not only domestically but also around the world.” [“Winners and losers in China’s next decade,” McKinsey Quarterly, June 2013]
Viktoria Sadlovska, Managing Director at Prameya Research, recently told the SupplyChainBrain staff, “Economic growth has recently slowed in the BRICS countries, causing concern among both global and domestic investors. In many industries, the time for reaping quick rewards from investment has passed. If companies want to continue succeeding in the BRICS markets, they need to increase their focus on creating competitive operational models, with a major emphasis on improving supply chain management.” [“The Turning Point for the BRICS Supply Chains,” SupplyChainBrain, 6 March 2014] The article explains:
“With the BRICS economic growth rate slowing in the past couple of years, attention has turned to the need for deeper reforms in these countries, which are necessary to ensure future development and prosperity. One of the areas that the BRICS countries need to pay special attention to is revamping their value chain management. First of all, there needs to be a shift from thinking about ‘supply chain management’, i.e., of how to deliver the right product to the right customer at the right time, to ‘value chain management’, i.e., how and where to position and use companies’ limited resources to create the most value for the customers. This includes taking a more strategic and all-encompassing look at supply chain management. Improving value chain management is where emerging market firms have an opportunity to differentiate themselves, especially considering tough infrastructure challenges in these countries that hinder their competitiveness.”
Transnational corporations operating in emerging markets face the same challenges as local firms (e.g., lack of infrastructure) as well as having to overcome the fact that their products may not be as familiar to natives as local products. The biggest challenge, however, may be finding consumers if the economic slowdown causes the growth of the middle class to stagnate. Companies headquartered in developed nations don’t enter the arena unarmed. First, the very fact that they come from a developed country makes them competitive. The Global Competitiveness Report 2013-2014 released last fall by the World Economic Forum reports that all of the ten most competitive countries are developed (Switzerland, Singapore, Finland, Germany, United States, Sweden, Hong Kong SAR, Netherlands, Japan, and United Kingdom). The report notes, “Some of the world’s largest emerging market economies must … engage business, government and civil society to implement long-overdue reforms. Of the five BRICS, the People’s Republic of China (29th) continues to lead the group, followed by South Africa (53rd), Brazil (56th) India (60th) and Russia (64th). Among the BRICS, only Russia improves its ranking, climbing three places, while Brazil drops eight places.”
Another advantage that many companies from developed countries enjoy over their emerging market counterparts is access to Big Data analytics. Joey Carnes, CEO of MIQ Logistics, told the SupplyChainBrain staff “that changing demographics, especially the aging of global populations, will have a profound impact on consumer-driven supply chains in the next five to 15 years and needs to be given greater weight in supply chain models.” [“Demographics: Not Just for Marketers Anymore,” SupplyChainBrain, 12 December 2012] Big Data analytics can provide actionable insights that not only help manufacturers and retailers better target consumers, but let them know what kinds of products are likely to be needed/desired now and in the future. “People in the supply chain spend a lot of sleepless nights on contingency planning for disruptions and disasters that may occur over the next one to two years,” Carnes told the staff. “I think the bigger question is what the consumer will look like in the next five to 10 years. That needs to be figured into supply chain modeling as well.”
One consumer segment that is often overlooked is the so-called “bottom of the pyramid” (BoP). This consumer segment includes people who remain firmly in poverty’s grasp and aren’t likely to move into the global middle class anytime soon. Studies have shown that even though individuals in this group don’t have a lot of money, as a segment they represent a reasonably-sized market. Selling to them, however, requires a different skill set, different logistics model, and different products (especially when it comes to product size). This group is predicted to become much more engaged in the global economy in the years ahead as mobile technologies continue to penetrate their ranks and mobile financial services become available to them. Anurag Agrawal, CEO of Intellecap, writes, “Systemic efforts have been made to capture the financial records and credit history of these customers in credit bureaus, and hopefully over time we can use emerging concepts like Big Data, psychometric profiling etc. to analyze and assess their true credit-worthiness. I am hopeful that the next stage of financial innovation will be able to bring the incremental cost of dealing with the poor close to zero so that they are also able to access the full bouquet of financial services at an affordable cost.” [“Cost vs. Tech: Will innovation make it affordable to transact with the BoP?” Next Billion, 7 October 2013]
There is a lot for companies to think about as they try to establish themselves in emerging market countries. Despite the current economic slowdown, global economic growth depends on the continued rise of a global middle class; and, China’s middle class may be the most important group of all.