Posted By Paul Tate, July 26, 2012 at 10:05 AM, in Category: Global Value Networks
If you still think that expanding your business onto other continents around the world is just about lowering production costs, it’s time to think again.
Ninety-five percent of the world’s consumers live outside the U.S. Fewer than 20% live in all the advanced economies combined. So, do the well-populated and increasingly affluent emerging markets in Latin America, Asia, and Africa feature in your growth plans for the next five years?
There’s lots of potential. While GDP growth in most advanced economies remains achingly slow, or is even contracting right now, many of the world’s developing economies are still expanding at a substantial rate, despite some recent softening in predictions this year.
In the latest Manufacturing Leadership Council call earlier this month, participants agreed unanimously that a foothold in one or more emerging markets was going to become increasingly essential to future growth plans for their manufacturing businesses.
But getting it right isn’t easy. According to a new report called Business Perspectives for Emerging Markets 2012-2017 by Global Intelligence Alliance (GIA), a substantial 91% of the 430 companies surveyed admit they wish they’d done things differently in their emerging market strategies.
Their main regrets are not adapting more to local conditions, not entering sooner, and not acquiring better market intelligence. Over half say that information on emerging markets is not readily available in their organizations, with three out of four doubting the accuracy and completeness of the information that they do have.
Nevertheless, international expansion strategies can certainly pay dividends. A recent study by GlobalData of 25 major pharmaceutical companies revealed that their revenue growth rates in emerging economies hit 13.4% last year, almost twice the global average of 7.5% for the sector.
The world’s automakers also expect most of their growth over the next few years to come from the fast-expanding BRIC countries (Brazil, Russia, India, and China). China, for example, is expected to be by far the world’s largest car market by 2016, according to 80% of auto industry executives in a recent survey by KPMG. The top second-tier emerging nations -- such as South Africa, Vietnam, Mexico, Turkey, Indonesia, Argentina, and even Nigeria -- also present increasingly attractive growth opportunities.
Nor are the pharma and auto sectors alone in this. Consumer, infrastructure, construction, chemicals, and many more sectors are all seeing higher growth rates in new markets as the world’s emerging economies strive to build more affluent societies. And it’s this growth potential that’s now driving many manufacturers to reach out to foreign lands -- not, as some may still think, to seek out low-cost labor and slash production costs.
According to the new GIA report, the key drivers for both large and midsize companies moving into emerging markets are building long-term revenues and gaining global market share. Seventy percent of the respondents say they are aiming to gain a foothold in these new markets for long-term success, and half say they are keen to build global market share; a third are looking for growth outside their established markets because these are currently suffering from lackluster growth and profits. Only 17% said it was to lower supply costs.
Interestingly, four out of 10 also say they have followed their customers into emerging markets, while one in four are aiming to diversify their risks as well as tap into short- to medium-term profits and growth.
Inevitably, the strategic reasons why companies expand overseas can be complex, and tactical approaches are often sector- or country-specific. With or without a local partner to help guide you through potential pitfalls, expanding into emerging markets is rarely simple. Cultural differences, competition, regulation, import duties, hidden costs, the quality of local support, access to talent, and IP concerns can undermine the best-laid plans.
So, if you are planning a global growth strategy for your manufacturing business, whichever emerging market you’re looking at, be sure you know what both your short- and long-term goals are, and do your homework first.
The world out there is full of growth opportunities for manufacturers, but to turn international expansion into profitable results takes more than just ambition, a good product, and a plane ticket.
Manufacturing Leadership Council Members can hear the latest on-demand debate on emerging markets via the Council home page.
Paul Tate is Executive Editor of Manufacturing Executive.
Written by Paul Tate
Paul Tate is Research Director and Executive Editor with Frost & Sullivan's Manufacturing Leadership Council. He also directs the Manufacturing Leadership Council's Board of Governors, the Council's annual Critical Issues Agenda, and the Manufacturing Leadership Research Panel. Follow us on Twitter: @MfgExecutive