Advertisement

Blog

Logistics: One Size Does Not Fit All

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.

16 comments on “Logistics: One Size Does Not Fit All

  1. Suzanne.Deffree
    July 12, 2013

    Many companies that “underestimated the extent of the infrastructure obstacles,” as you say Gerry, now find themselves suffering the consequences of leaping without look. Without the preparations you note, some may find their establish market business suffering as emerging market issues hamper the overall organization ability to properly do business.

  2. _hm
    July 14, 2013

    @Garry: It is quite wrong to conclude that westner are less corrupt. What I have observed, when they land in developing nation, they get feeling of money power and they also  equally become part of corruption, if not main character. Power and money seduce one to corruption and that is more of human nature. Most trans-national corporate organization directly or indirectly becomes part of corruption in developing nation.

    In general corruption is universal and that is part of human nature.

  3. t.alex
    July 14, 2013

    _hm, yes this is 100% true, and we can't blame the westerners in some cases. In some countries, in order to get the business the only way is to bribe. 

  4. _hm
    July 14, 2013

    @t.alex: I would say following:

    Values – It depends on personal and corporate values. Which in turn relates to ones education, training, childhood and values inculcated by society.

    More effort: You may be able to achieve goal with little longer efforts or may earn little less business, but it is always possible to do business with good values and without corruption.

    I was advisesd by my venerated mentor that never do wrong thing (corruption). As you grow bigger and more established player, those wrong things will haunt you. Also like crime scene, you always forget to erase some of your crime footprints. And eventually you get caught and will suffer severe criminal punishment.

    We do observe this in our contemporary politics and business too.

     

  5. Taimoor Zubar
    July 15, 2013

    “Without the preparations you note, some may find their establish market business suffering as emerging market issues hamper the overall organization ability to properly do business.”

    @Suzanne: I think this mostly happens with companies who are well-established in one part of the world such as Europe or North America and go to other parts such as Asia or Africa where they don't have prior experience and are not aware of the market dynamics well. They do find infrastructure issues and other issues that they hadn't accounted for and these do hamper their success quite strongly.

  6. Suzanne.Deffree
    July 15, 2013

    @TaimoorZ Agreed.

    Overall, we should not ignore culture differnces, in addition to infrastructure differnces. Due diligence is always needed there, as well. 

  7. Taimoor Zubar
    July 15, 2013

    “In general corruption is universal and that is part of human nature.”

    @_hm: I do agree with you but there are laws designed to deter corruption. In the developed countries, the law enforcement is strong and companies have to abide by them. In less developed countries, the same companies can get away with the laws and can get their work done through other means so they choose to do so. The weakness in the enforcement of laws leads to corruption.

  8. itguyphil
    July 15, 2013

    The dollar is the loudest voice for a lot of people.

    So although the laws and mechanisms are there to prevent corruption, that is often where you must be the most vigilant because it happens right in front of you.

  9. Daniel
    July 16, 2013

    “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.”

    Gerry, normally they used to appoint some consultancy for ground works and exploring different business opportunities with the new places.  If such consultancy have enough back up, then they will be able to guide the new venture and nothing to worry.

  10. Taimoor Zubar
    July 17, 2013

    @pocharlie: It has never been about the existence of laws. Laws exist almost everywhere and it doesn't matter how sophisticated they are. What makes the difference is their enforcement and how strictly is the violation of laws dealt with. Developing countries are well-known for their weak law enforcement and hence there's a high degree of corruption there.

  11. itguyphil
    July 17, 2013

    It's an unfortunate truth and reality.

  12. SunitaT
    July 20, 2013

    A company with its eyes set on a specific goal in a foreign market has to be informative, as explained above, venturing out with theorized data can be catastrophic, as it often differs from the hands on data. For this, analysts present inside the foreign markets, who are well-fed with information on how the market works, need to be consulted.

  13. FLYINGSCOT
    July 21, 2013

    ……which is why is is always a good idea initially to get an established local company working for you to help steer the correct course.

  14. Houngbo_Hospice
    July 22, 2013

    @FLINGSCOT— That makes sense if local companies are qualified to to the jobs. But sometimes, this solution might be more expensive than outsourcing solutions.

  15. Houngbo_Hospice
    July 22, 2013

    @TaimoorZ– You have a point, but not every business process is transparent in developped countries either. And sometimes some of the corruption behaviours in developping countries are sustaiend by western companies looking for new markets in these countries.

  16. Taimoor Zubar
    July 29, 2013

    @Hospice: Corruption can never be reduced to zero anywhere but while making the comparison, we're looking at two things: how widespread the corruption is and how severe is the impact. Based on these two, corruption in the developing countries is far more widespread and deeply entrenched into the roots of the country where the impact is quite severe. It's much more difficult to get rid of it.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.