Frontier mentality

MM&D began the year by hosting a roundtable of industry experts who shared their thoughts about how and why supply chains should extend into emerging markets. Editor Carolyn Gruske moderated the discussion and reports on the conversation. Photos by Roger Yip

Doing business in foreign countries is nothing new for those employed in supply chain operations, but more and more these days businesses are heading into essentially unknown territory.

While emerging and frontier markets hold the promise of wonderful business opportunities, realizing those opportunities involves research, planning, hard work, and long-term investments of time and resources. That’s the consistent message from roundtable panelists, Wendy Trudeau, general manager, central region for FedEx Trade Networks; Todd Winterhalt, group vice-president for international business at Export Development Canada (EDC); Ruth Snowden, executive director of the Canadian International Freight Forwarders Association (CIFFA); Brian Macdonald, Montship president and CEO; Lise-Marie Turpin, Air Canada Cargo vice-president cargo; and Eric Allard, global head of logistics at Husky Injection Molding Systems.

Emerging markets vs frontier markets

Although there are no hard and fast rules about exactly how to define an emerging market, the panelists agreed on a number of features as indicators of an emerging market. These include rapid industrialization, low wages, low input costs, underdeveloped financial, legal, physical and technological infrastructure, rapid social change (including a growing middle class with a desire to purchase products new to their market), political risk, and difficulties conforming to (or implementing) international trading compliance and regulations.

According to Todd Winterhalt, “if you go with the technical definition, these are really non-OECD-type markets. So you’re talking about 145 to 150 markets worldwide, out of between 180 and 200, depending on how you categorize them. Just to give you an idea of scope. There’s a lot of them out there.”

Categorizing them, however, can be an exercise in shifting definitions. As Ruth Snowden pointed out, “I think there’s a phrase in the financial industry—they call them ‘frontier markets’. These are geographies that usually have serious capitalization and regulatory issues. And they’re not emerging markets yet,” she said.

“These are pre-emerging markets, where there’s even more opportunity and risk.”

Rewards

Stretching a supply chain into any new market isn’t something that should be done on a whim. There have to be solid business reasons behind any expansion. One good reason for trying a new and emerging market is to counterbalance existing market conditions.

“If you’re focused strictly on one region, you want to diversify your market so you can mitigate some of the risk of economic downturns,” Wendy Trudeau said

Beyond protecting what you’ve already established, the move into an emerging market can also present the possibility for future expansion.

“It’s about growth opportunities,” according to Lise-Marie Turpin. “Once you establish yourself in mature markets, where are you going to go for growth?”

“If you look post-Lehman [Brothers], it’s the emerging markets who were not exposed to the toxic credit that the developed world was, so today’s there an even better opportunity to grow than there was prior,” Brian Macdonald added.

Even in business, not all rewards are financial. Sometimes there are secondary positive spin-offs that can prove rewarding on non-monetary levels.

“We have whole countries with low literacy rates, with unemployment, with poverty. So if we can create opportunities there, I think it helps the whole world. It helps all of humanity to improve. We have a great lifestyle here, not so much maybe in Guatemala or Nicaragua, or Vietnam. So I think we have an opportunity to benefit other people,” said Snowden.

Challenges

As noble as altruism may be, extending a network into an emerging market is always a risky venture and one that needs to be made with an eye on the bottom line. It requires careful planning down to the last detail.

As a manufacturer of machinery and equipment to produce plastic beverage bottles, Husky Injection Moldings has production and DC facilities in 12 countries, and a supply chain that reaches across the globe. The related challenges are pricing, regulations, duties and Incoterms.

“We need to have a grip as an industry, from a manufacturing side, on what are the Incoterms. It’s amazing what people do not understand in the responsibilities they’re signing off in trade compliance and anti-dumping,” said Eric Allard.

“You open a plant in China, to support the Asian market, but guess what? You do not send machinery from China into India. There’s a 300 percent duty on a multi-million dollar machine, and your customer is very upset,” he said.

“You have to do your homework. In each specific country, set your rules and regulations. It’s one thing to have a business plan, but there’s a lot more work to be done.”

As an example of this, Allard spoke about denied party screening—ensuring that parts and equipment Husky sells won’t be resold into embargoed or banned markets, such as Iran.

“I need to back-screen every one of my customers around the world and make sure they’re not going to dismantle my machinery and use certain parts that could have military applications,” he said.

Allard also spoke about delivery (both to and within the market) and infrastructure challenges, but all the panelists agreed these are to be expected.

Montship’s Mcdonald said every time the shipping agent looks at entering a new market, there is a long list of questions to be asked.

“Do they have a port system? Can they handle our ships? What kind of productivity are we going to get at the ports? What’s their technological set-up? Can they track and trace?” He warned if businesses can’t guarantee service delivery standards “it’s going to tarnish your overall brand, so that’s a concern.”

Emerging markets often present difficulties when it comes to the more intangible aspects of business relationships, according to Air Canada’s Turpin.

“Language definitely. And understanding the context in which the people are operating,” she said. “These things have a big impact on how well we’re going to communicate and how well we’re going to understand what needs to be done.

“And asking the right questions, too. We may assume something, and yet if we’re not thorough enough or ask the appropriate questions, we may not have the information we need to make the right decision. So it is an important thing, and one that’s not easy. It takes many years to get your head wrapped around that so you can actually ensure you are getting the right information to make the appropriate decisions.”

Another challenge is ensuring the company’s business ethics, not to mention the minimum acceptable legal standards of the country where the company is headquartered, will be applied in the new market.

“When we’re entering these markets, we’re doing our research beforehand. We’ve got experts we’ve identified and we’re able to bring onboard. If we were to find it is a market that is—I don’t want to use the word corrupt—but it’s a market we can’t do business in while protecting our brand, then we would probably rethink. That’s part of our research in advance,” explained Fedex Trade Network’s Trudeau.

Corruption and crime are concerns across the board. They are found everywhere from the micro level (individuals cheating single businesses) to the macro, where the political structures and governing bodies operate in a manner considered unethical.

EDC’s Winterhalt said examining political risk is one of the key steps any organization needs to take before committing to a frontier or emerging market.

“The way we sometimes talk about it, we place political risk at the highest level, but then that breaks down. So is it a risk of an asset that you’ve got in a warehouse that you’ve made an investment in? Or is it beyond that? Is it repatriating your dividends back out of their country? Maybe you can’t. Maybe you’ve got foreign exchange controls that can apply after you’ve already made your investment. So that concept of political risk, broadly speaking, ties together and goes into the security aspect. And it certainly does get into corruption. Also, are there environmental or other types of concerns that as a business you have to be aware of?”

Market pressures

As great as the challenges can be, many businesses are being forced into emerging markets. They fear by not expanding their supply chains, they’ll be left out in the cold, unable to compete. Competitive pressure is a very real and strong driver, according to Winterhalt, especially when growth is flat or down in Western markets, including Europe and the US.

“There’s the cost of doing nothing, which is potentially the diminution of your own business—or worst-case scenario, you go right out of business because you’ve lost the market in the traditional market, as well as the opportunity in the emerging market space. We find that drives a lot of people, beyond just mitigating risk, this is not only a growth strategy, it’s a survival strategy because this is the way, generally speaking the world is going—to the emerging markets space.”

Even if a business finds itself forced to jump, and jump quickly, into new supply chain territories, that doesn’t mean it should expect quick rewards in return.

“When we’re thinking of emerging, we’re thinking of a rapid pace,” said Turpin. “I think sometimes when one goes into these markets the companies are expecting rewards to come in much more quickly than they will. Because, even though we talk emerging, it is a long run. It is a marathon. This is not something that happens overnight. I think we need to be mindful of that because of the challenges.”

Mcdonald provided an example of that.

“It takes a long time to build a terminal. MOL built the terminal in Cai Mep [Vietnam] early on, and it was a beautiful terminal, but there was no road coming in. It was a dirt road, and you’ve got containers you’ve got to get off there. So then you have to wait for the land side of the infrastructure to catch up with the terminal. And there are pinch-points all along the road. But if you can get in early there are advantages for sure.”

One of the main pressures when entering an emerging market, is to have people on the ground who understand the business, regulatory and social environments who can act as in-country contacts and advisors. Many organizations find this impossible, so they rely on local experts, but that practice is not without challenges, especially when it comes to maintaining the organization’s brand reputation.

“From our standpoint, when we’re entering these markets, we are looking at local in-market experts. We’re not bringing people in from other parts of the globe to run the business there because they don’t have the knowledge of customs, language and regulations. They don’t have the knowledge of the carrier base. So it’s important for us to have those in-market experts join our organization and then we can teach them our quality management system, our processes and so on. So in that respect, we can give the local flavour with the global FedEx brand,” said Trudeau.

Regions and countries

Since supply chains run in essentially two directions (raw materials and goods in and finished products out) it’s critical that every new market be examined for its potential to improve each side of the equation.

From Husky’s perspective, a country like “Saudi Arabia is not going to produce anything. They’re going to be buying. But if you take a look at some of the old Russian countries, in terms of iron, metal

and minerals, they great exporters. They’re not going to be buying anything because they don’t have the infrastructure to produce,” said Allard.

“If I talk to my

sales and marketing guys, they’re going to say, ‘you know what, Eric, we sell two machines to Uzbekistan every year, but we buy $40 million dollars worth of products.’ So the perspective is going to change based on the need. Is it inbound or outbound selling? To me—and I’m very opinionated—both of these supply chains have different, demanding needs.”

Businesses must realize just because they’ve dealt with a supply chain in a similar country, they shouldn’t presume to think they know exactly what to expect.

“People always short-sell the amount of time required to do the due diligence. They think ‘I’ve done it once.’ There’s a level of comfort that builds up. But every market is different,” said Winterhalt.

“China and India: night and day difference. Vietnam and Thailand? Different. They may be close, but they’re going to be completely different. So that expectation, that level of time and investment of energy, research, thought power at the company level, needs to be very clearly articulated right at the beginning.”

As for which countries are catching the attention of the roundtable members, the list of markets contains both expected and unexpected names. BRIC countries were top of mind, but Brazil, Russia, India and China are no longer the sole or dominant players.

Winterhalt said TIMBI —Turkey, Indonesia, Mexico, Brazil and India—is worthy of attention. Another region he singled out is the southern corridor that runs along the bottom half of the world, through places like Chile, South Africa, southern India, Indonesia and Australia. He said EDC expects the corridor to see approximately $8 trillion in CAPEX (capital expenditure) investments across three sectors—extractive, energy and infrastructure—in the next 10 to 15 years.

But even that area doesn’t show the most short-term potential. “If you’re looking at the greatest growth, from our perspective it’s southeast Asia over the next three-to-five year period.”

Mcdonald said from the Montship perspective, “in Asia we’re looking at Vietnam of course, because we’re established there, but also Myanmar [Burma], and Cambodia. Almost all of South America is an extremely good market right now.”

Snowden echoed Mcdonald, saying: “You can’t get a hotel room in Burma, because every company that wants to do business there is buying up hotel rooms. To me that indicates somebody thinks this is going to be a market. You know they’re pulling their staff, they’re looking at building, they’re looking at infrastructure, so I look at a country like that as very exciting. Huge challenges, but that whole area is going to be very interesting. And Vietnam—if they can get over their congestion issues.”

Trudeau said for FedEx Trade Networks, South America is important. “I think there’s still huge potential there. We talked about Brazil. And Chile is fairly well established, but I think in the northern part of South America, there’s huge opportunity in Colombia and Ecuador and so on.”

For Turpin and Air Canada, it’s still China that is most tempting. “We’re investing a lot in China because the middle class has been growing and there’s desire for what we have over here over there. We’ve really seen a shift in the balance between Canada and China.”

Turpin added that Brazil in particular and South America in general are also of great interest to the company. “Our problem is getting more capacity to be able to serve these markets more fully,” she said.

“And one that I think is very interesting—that we’re about to focus on this summer is Turkey: Istanbul. That really is a gateway for us to get to points in Africa and the Middle East, notwithstanding Turkey iself. We think there’s opportunity there as well.

Most African countries (with the possible exceptions of South Africa and Morocco) rank at or near the bottom of the roundtable participants’ list when it comes to possible areas of expansion. While this may seem appropriate at the moment, Winterhalt added that in the longer term—approximately five to ten years from now—the potential of these countries will present opportunities to Canadian businesses.

Allard said Husky is casting a wide net. “I’m going to say it’s everything outside of North America for us. The focus is obviously on Southeast Asia, Africa, Russia and the Middle East, all at the same time.”