Supply Chain Frontiers issue #17. Read all articles in this issue.
For many companies future growth will be fueled by emerging markets. More than 80% of the world’s population lives in non-developed countries, offering virtually unlimited potential for business growth. But to capture these opportunities, companies will have to overcome some complex challenges. These regions represent less than 20% of the world’s GDP and require supply chains capable of delivering low-cost products profitably to an extremely diverse customer base.
The list of companies that are expanding in developing countries is getting longer. For example, Nokia’s sales in China, Hong Kong and Taiwan jumped 28% last year making the region its biggest market. India is expected to surpass the U.S. as Nokia’s second largest market by 2010. Developing markets currently represent 35% of sales for Unilever. GE expects that 60% of its growth will come from these countries in the next decade compared to 20% for the past 10 years. P&G devotes about 30% of its $1.9bn annual R&D spending to low-income markets.
These companies are forging supply chains that are uniquely adapted to the rigors of emerging markets. Product needs are different with much lower price expectations as compared to developed markets. Transportation infrastructures are often poor yet must serve high-density population centers as well as remote, sparsely populated, rural areas. A diversity of cultures and languages adds to the fragmentation. Political turbulence, overweening bureaucracies, corruption and complicated regulatory frameworks are also common features of this unfamiliar business terrain.
These differences are not trivial and require a distinct set of products that are supported by one-of-a-kind supply chains. Some companies are rising to the challenge. Motorola has developed and commercialized an ultra-low cost (priced at less than $30) cell phone handset. In India, Nokia’s handsets come with a dust cover and slip-free grip specially designed for the country’s climate, and in China, its phones allow users to write Chinese characters with a special stylus. The One Laptop per Child initiative is developing a $100 laptop. P&G has been very successful in China with a redesigned packaging of its Crest toothpaste that uses cheaper, less glossy, and therefore lower-cost packaging. Such products are not simply cheaper variations of those sold in developed markets – they are designed to appeal to the specific needs of consumers in emerging countries.
Given the unique market conditions found in developing countries, manufacturing, sourcing and distribution decisions must be made early in the product design phase. Manufacturing processes that leverage local suppliers can give companies a sustainable competitive advantage. Through its experience with an experimental diaper factory in Vietnam, P&G was able to cut the cost of sourcing diaper manufacturing by 30%. These product and process re-designs allowed P&G to engage a low-cost supplier network that is more accessible in emerging markets, as opposed to high-speed, sophisticated manufacturing used in developed markets.
Emerging markets require more flexible and adaptable distribution networks. In Brazil, up to 15% of apparel is sold door-to-door in poorer neighborhoods. India’s smallest villages - an estimated market of 600 million - are not easy to reach. Unilever is providing training and product information to groups of women who sell its products in smaller units direct to these communities. The ability to reconfigure distribution networks to better serve local needs will become increasingly important in these markets. For instance in the last few years Nokia has decentralized its China operations by increasing the number of sales offices from 3 to 70 and moving from a handful of national distributors to 50 provincial ones.
Competition in emerging markets is intense. It comes from both global corporations that are looking for new business as well as local players using the developing world as the launching pad to build global empires (Lenovo, Tata, Wipro, SAB Miller and Embraer, to name but a few). Building the right supply chain in emerging markets requires a cost-conscious, locally driven organization that can leverage the global state-of-the-art strategies pioneered in developed markets. Reconciling these elements does not happen overnight, but by recognizing the differences and understanding the multiple dimensions of serving immature markets, supply chains will be a key source of long-term competitive advantage.
This article was written by Edgar Blanco, Research Associate at the MIT Center for Transportation & Logistics, who is researching how companies can develop supply chains that support growth strategies in emerging countries.