Making the most of emerging markets

Posted on 7 May 2013 by The Manufacturer

Got your eye on an emerging market as an export target? Ronan Martin-King talks with manufacturing supply chain veterans about the pitfalls and priorities when establishing distribution and marketing channels in new countries.

Returns in emerging markets can be much higher than those offered in domestically or in Europe. But they also present big risks and if you don’t play a long game, backed up by careful planning, fresh thinking and flexibility, you will fail says Monte Maritz, now a partner with supply chain consultant, Oliver Wight but previously business strategy director with South African packaging manufacturer, Nampak.

Explaining why, Mr Maritz says, “People mistakenly think emerging markets are all the same. But making the mission statement ‘we want to be in emerging markets’ is meaningless if you’re not sure which market you’re going to be in and how you’re going to target it. Every country has its own unique challenges in terms of infrastructure and access.”

Relationships are vital to creating appropriately nuanced business models and it’s important to realise that it will take some time to develop the market and get a return continues Maritz. This means that market entry can be an unnerving and frustrating experience, especially in economies you know to be growing by as much as 10% a year, where opportunity abounds in theory.

Monte Maritz, Oliver Wight
Monte Maritz, Oliver Wight

“Making the mission statement ‘we want to be in emerging markets’ is meaningless if you’re not sure which market you’re going to be in and how you’re going to target it” – Monte Maritz, Oliver Wight

“The trouble is that the entry level often doesn’t involve a critical mass of work that would give you a full presence,” says Maritz. “You’ll probably have to start small and grow from there. First, introduce a rep; then open an office and then build an operation.

“In Africa the companies getting all the business now are the guys that took the chance five, ten, even twenty years ago. Now those markets are maturing and people are remembering who was there in the difficult days. ”

Expressing long term commitment to locals can be done in many ways. But your attitude towards varying exchange rates is one place to start making an impression Maritz suggests. “You need to ask yourself whether you are going to try and win on the exchange rate by chasing it when it is in your favour, or make the assumption things will even themselves out in the longer-term.”

Interest rates in emerging markets can be eight to 15%. So they also have an impact in terms of the cost of working capital points out Maritz. He found that sharing inventory burdens with suppliers can help, but warns that this goes against the grain with some.

“We had European suppliers who didn’t understand the complexity of the geographical process and refused to ship anything less than a full container load [a year’s worth of stock]. We had to go to China and India to find suppliers who would find a way to make supply work for us.”

Process power

Knowing where to build relationships and when supply may become a challenge relies on establishing a thorough product management process says Maritz. No manufacturer should venture into a new market without developing one specifically for the market in question he insists.

“Every launch into an emerging market is a new product development because the circumstances in which products are made and used for each market are different. Nine times out of ten when you burn your fingers in an emerging market, it is because you have made a single play across your export prospects.”

Using his experience in the packaging industry to explain how product management might vary from market to market Maritz recalls, “We would take an existing packaging design into the emerging market, but that same look and feel had a different specification – for transportation or because it was sold from a market stall instead of a supermarket for example. If you assume you can do without a formal process for identifying and accounting for these kinds of issues, you will pay a lot of school fees.”

Stuart Harman, Oliver Wight
Stuart Harman, Oliver Wight

“It transpired the Chinese didn’t drink draft beer because they like to see the bottle opened in front of them. The brewery was left with far too much inventory for a long time and lost a lot of money on it”Stuart Harman, Oliver Wight

Becoming local

An important stage to take into account in a product management process is the time you think you will progress from simply being an importer of goods in a country to being a local presence which adds value.

Defining this early on will make progress easier says Maritz as it’s important to accept that in most emerging markets there’s a desire to see bricks and mortar, not just containers. It also helps existing suppliers and customers see where there may be opportunities to align for combined confidence in a new market.

Maritz explains, “The first organisations into big emerging markets are FMCG multinationals and telecoms companies. Canny business will approach these guys and say ‘if you build a brewery, we’ll build a packaging plant next door’ or ‘if you build a supermarket, we’ll build a distribution centre’. The message is that you will follow and align yourself to support their prospects.”

Do your research

This collaborative approach encourages profitable business clustering, but don’t simply assume a major customer has done their market research and that the market is a sure bet warns Stuart Harman, formerly of Australian gas cylinder manufacturer, Luxfer and now an Oliver White partner.

Reinforcing the need for companies to undertake independent market research, Mr Harman relates Luxfer’s experience of following a large customer – a brewery – into China. “There was great excitement at the time because the brewery had identified that the Chinese were not big drinkers of draft beer and thought they’d uncovered a huge market opportunity.

“Unfortunately it transpired the Chinese didn’t drink draft beer because they like to see the bottle opened in front of them, so they know what they’re drinking. The brewery was left with far too much inventory for a long time and lost a lot of money on it, although they have done very well since.”

On Luxfer’s own part, finding eventual success and security in China hinged on the decision to open and office in Shanghai having previously relied on sales trips from Australia. “The Chinese market is about building relationships and knowing how business is done. It’s very difficult to do that when you fly in and out,” says Harman. Local representation also proved crucial in navigating local laws, taxes, and non-tariff barriers.

Maritz insists that entry into an emerging market should not be regarded as a project that needs investment but as a strategic plan that’s about getting a percentage of the market share.

“If you’re a good company that knows what it’s doing you can make it pay eventually. But if you focus on ROI over creating strategic presence, you will fail on two counts – you won’t put the rigour into planning and, from your western-centric perspective, you will find it hard to justify the cost of the return against the existing market.”

Simply put, Harland says you have to accept that emerging markets are risky while Maritz compares it to venture capitalism. “Not every venture will work. But when they do the returns are high. You only have to successfully get into one Nigeria, Kenya or Egypt, for example, to offset a few flunks,” he concludes.