Supply Chain Frontiers issue #20. Read all articles in this issue
For shoe manufacturers in China, it can be cheaper to export product and then import it back into the country than to sell direct to domestic markets. It’s one of the quirks of doing business in emerging markets that requires a special kind of supply chain. A recent Roundtable organized by MIT’s Center for Transportation & Logistics (CTL) looked at the challenges.
The Supply Chain Strategies in Emerging Markets Roundtable gave companies the opportunity to exchange ideas on how to design and build emerging market supply chains. There is huge potential for new growth in these countries provided companies can overcome a number of unique challenges. For example, a participant explained that shoes made in China for domestic buyers are subject to a value-added tax of 17%, but product for export is not subject to VAT. In some cases, it is more cost-effective to send the goods out of China, ship them back, and pay the import duties than to pay the VAT if the items never leave the country.
Variations in regulatory codes, infrastructure quality, cultural attitudes, and business practices can profoundly affect supply chain design. Moreover, it is easy for companies to be lulled into thinking that developing markets move relatively slowly, when the opposite is often the case. One Roundtable attendee suggested that the data a company uses to design a supply chain might need adjusting every six months to keep pace with market changes.
An example of the rapidly changing environment is how suppliers in many developing countries are eagerly adopting western business practices. A participant pointed out that in China it no longer has to use high-quality Western printers for its packaging because local suppliers have become much more sophisticated.
Hitting on the right sourcing strategy is of crucial importance. CTL Research Associate Edgar Blanco, who organized the event, described three alternatives with very different implications for supply chain design.
Make globally and import locally
Making the product outside the emerging market in established plants is often the best option when the current competitive opportunities do not justify investing in a new plant. The upside is that this strategy requires the least investment; on the downside, there are added shipping costs, customs delays and duties, and exchange rate risks. A leading IT product manufacturer supplies its Asia-Pacific customers from plants in the U.S. and Ireland.
Global suppliers and local assembly
By sourcing components globally but assembling locally, companies are able to stay in close proximity to domestic markets and access local support services while maintaining a reliable supply of parts. This is particularly useful where components are complex and/or expensive. Dell Latin America buys computer components on the global market but has assembly operations in Brazil.
The disadvantage of this alternative is that supplier coordination and planning are more complicated. Also, domestic consumers may actually prefer foreign-made goods. For example, Mercedes cars that are assembled in Egypt have a much lower resale value than those assembled in Germany.
Manufacture locally
Committing all manufacturing operations to the home country enables companies to take advantage of low labor costs and become more intimately involved in the local culture. Nokia has deployed this strategy in India. However, this option also involves relatively high levels of investment, dependence on local resources, and exposure to risks such as political instability.
To help companies make choices like these, CTL is embarking on research into the unique challenges of emerging market supply chains. Some of the issues to be addressed came from the Roundtable participants. For example, there is a need for a more complete taxonomy of factors that companies can use to assess market-entry risks in emerging countries. “By taking account of these various factors, companies can maximize the chances of success in emerging markets, and even use the methods they develop to improve supply chain efficiency in mature markets,” said Blanco.
For more information on the Roundtable and CTL’s research into emerging market supply chains, please contact Edgar Blanco.