Two demographic trends are positioning emerging markets at the forefront of the technology sector’s future: The rise of the global middle class and urbanization. Over the last decade, the cumulative proportion of global output for the emerging markets of Brazil, Russia, India and China (BRIC) has increased from 38 to 50 percent. Other emerging markets, such as Mexico, Turkey, Indonesia and South Africa are experiencing rapid advances as well.
Such rapid growth makes these countries attractive for technology companies in search of new sales. In a recent survey, 150 top executives in multinational companies indicated they expect about 28 percent of their global revenues over the next five years to come from emerging markets.
“The high-growth emerging markets of the world are building new cities, where residents, companies, universities and opportunities for prosperity are creating attractive new markets that are unfamiliar to many companies,” says David C. Michael of the Boston Consulting Group. By 2030 all developing regions, including Asia and Africa, are expected to have the majority of their citizens living in urban areas and virtually all population growth over the next 30 years is predicted to be in cities.
As total population grows, so does the size of the global middle class. The World Bank predicts that by 2030, more than one billion people in the developing world will belong to the middle class – more than twice the number fitting that description in 2005. Income levels in emerging markets increased by 96 percent from 2000 to 2010 and are expected to grow an additional 45 percent from 2010 to 2016, driving a wave of consumerism for all types of goods, from basics to luxury items. (See: Electronics Supply Chain Redefining China’s Role).
Urbanization and the rising middle class represent a huge opportunity, as well as a significant challenge, for tech company supply chains. To prosper they must do three things at once:
- Be prepared to fulfill rapidly growing and highly volatile demand patterns
- Operate in a very complex environment caused by inadequate infrastructure and complex and highly divergent regulatory requirements
- Hedge their bets regarding inventory carrying decisions both to ensure supply and avoid obsolescence
While high growth markets present enormous challenges, the growth opportunity they represent for technology companies is without precedent. To capitalize on this opportunity, the sector must create supply chains that are flexible, scalable, cost-effective and risk tolerant.
In the high tech sector, rapid prototyping is a common practice in product innovation and development. Rapid prototyping is a technique for mocking up parts or models pre-production, and is used to test a concept or process before going to mass production.
Supply Chain Challenges
Best practice technology supply chains in emerging markets embrace a similar approach. They are structured to start small, but with contingent capacity to scale up quickly, in a way that optimizes cost and controls risk, while effectively meeting demand. This contingent capacity must be vetted in advance, especially to avoid the kind of last-minute scramble for capacity that often results in service failures.
Thus, network and operational agility become key differentiators for best practice technology supply chains. This agile approach revolves around being asset light, but with access to fully qualified capacity when and where it is needed, typically through partnerships with logistics service providers. Supply chains must be able to expand and contract according to market conditions and consumer demand. In high growth emerging markets, companies may need their supply chain capacity to grow 20 percent to 30 percent a year upon market entry.
Sales volumes in emerging markets can expand and contract rapidly, and demand is difficult to forecast, given the nature of new markets. Therefore, technology firms must develop effective strategies both to mitigate and to capitalize on the demand volatility. Fortunately, a broad range of solutions is available to address these challenges. These include improved forecasting techniques, joint planning and collaboration and postponement solutions.
Postponement solutions involve delaying the customization and configuration of products as late as possible, so that they can be redirected away from markets that suffer last minute downward fluctuations in demand. As technology companies work to manage these risks in emerging markets, a growing number are realizing the potential value of adopting a multi-user environment that helps reduce costs and produces economies of scale.
In this model, technology companies share supply capability and capacity in a multi-user warehousing environment provided by a third party logistics service firm (3PL).
Unlike developed markets, emerging countries offer complex risks associated with local regulatory compliance including: tax laws; sanctions and embargoes; health and safety regulations; business disruption; IT security; data protection and environmental regulations. Additionally, bribery and corruption is a real concern for international companies entering emerging markets.
Western governments are increasingly using extraterritorial powers, in addition to local anti-corruption laws, to sanction companies for corrupt practices committed abroad. By engaging in corrupt practices or cutting corners on compliance in order to drive through the bureaucracy, even the most respected brand can be damaged. With so many aspects to consider and so many new and changing rules to understand and follow, prioritizing compliance and quality from the start, rather than using low-cost, quick fixes, will enhance brand value while minimizing regulatory risk.
In addition to these business challenges, there is also a high risk of organized crime in some emerging markets such as Mexico, Brazil and parts of India and Africa. For this reason, technology companies should find partners who are capable of leveraging sophisticated and effective security techniques to mitigate these risks.
With such strong consequences for making the wrong decision, technology companies must choose wisely when forming partnerships for emerging markets, including carefully evaluating whether local providers have the adequate capabilities to meet customer requirements and fulfill contractual obligations. The selected logistics and supply chain partner must not only meet the company’s own standards on compliance but also meet the legal standards required by the regulatory systems of the different countries in which they are active. This is essential in terms of maintaining brand value and avoiding the risk of harmful and costly litigation. Ultimately, companies may find that it is worth paying a premium for a service that guarantees strong performance around compliance, security and reliability in order to mitigate the significant and varied risks.
One of the most significant challenges facing technology companies in emerging markets is coming to terms with the diversity of consumers, infrastructure and supply chains that exists both between different countries and within individual countries themselves. This is in stark contrast to developed markets, where supply chain arrangements can reflect the largely homogeneous nature of capabilities and infrastructure.
There is no “one size fits all” approach to supply chains in emerging markets as every country has its own challenges and opportunities. Therefore it is essential that technology companies tailor their supply chain solutions to the specific challenges of the individual markets.
This article was excerpted from a new research report titled Path to Growth: Shaping Tech Sector Supply Chains in Emerging Markets and authored by Lisa Harrington in collaboration with Jan-Thido Karlshaus. Harrington is president of lharrington group LLC and associate director, Supply Chain Management Center, Robert H. Smith School of Business, University of Maryland. Karlshaus is VP, Strategy & Business Development, Global Technology Sector, DHL Supply Chain. The full report can be downloaded at www.dhl.com/emergingmarkets. Find out more at www.dhl.com/supplychain.