When the IMF recently cited slower than expected growth in emerging markets as the chief cause of its reduced global growth forecasts for 2013 and 2014, the blogosphere immediately lit up with speculation that the much-hailed emerging market opportunity was turning out to be more hype than reality.
While I disagree with this knee-jerk reaction, I do believe that much of the discourse around the potential in these regions has failed to adequately address the significant logistics challenges multinationals face when they venture into these still developing countries.
Though I don't imagine that there are many Western-based business executives who expect to be able to enter emerging markets with a “business as usual” approach, I have seen many organizations vastly underestimate the extent of the infrastructure obstacles inherent in these markets and how much of an impact this can have on the total landed cost of their products.
For example, when evaluating a potential new operating region, you must remember that the elements of a country's infrastructure extend well beyond the transportation — roads, rail, ports, and air — capabilities. Economic and political stability, access to adequate power and water resources, import/export procedures, tax structures, regulatory framework, and available talent are factors largely taken for granted in North America and Europe, but can vary greatly in developing nations. In addition, each region has its own particular set of circumstances that must be addressed when creating a logistics strategy.
In Brazil, for instance, your tax liability will vary substantially depending on where in the region you set up your facility. Indonesia, which jumped up to No. 5 on the 2013 Agility Emerging Markets Logistics Index, is still known to have a highly complex customs clearance process that can result in long delivery delays as containers sit in port waiting for clearance. And, until it was just recently put on hold by Prime Minister Manmohan Singh, India’s Preferential Market Access Policy restricted opportunities for telecom providers in the region by giving preference to indigenously manufactured products.
While there are many adjustments multinational companies can make to accommodate the varying capabilities and requirements within an emerging market, there is one area where there can be no room for compromise — corruption. In many regions, what Westerners would consider to be bribery, locals regard as standard operating procedure. It is essential to ensure that any individual working on behalf of your organization act in accordance with your corporate code of ethics and United States federal law — most notably the 1977 Foreign Corrupt Practices Act (FCPA), which prohibits the bribery of foreign officials. Violation of FCPA can be extremely costly. For example, in 2008, Siemens AG paid a whopping $450 million fine for violating the FCPA, and in 2011 pharmaceutical company Johnson & Johnson paid $70 million to settle cases brought against the company.
The bottom line is, as with any new venture, organizations must do their due diligence before committing to set up shop in emerging markets. There are literally trillions of dollars in consumption potential in these markets, but these economies are characterized as “developing” for a reason — they still have a long way to go before they reach a level of maturity that brings greater stability and consistency. So, be thorough, know your limitations, and be patient.