Emerging Markets Break Through
To tap the potential of emerging markets, shippers and their service providers spring forward with new logistics tactics and strategies.
While 2012 saw economic growth in the United States limping along at roughly two percent, and the European Union contracting 0.2 percent, the 45 nations categorized as emerging markets grew at an average of 4.4 percent, according to Agility’s Emerging Markets Logistics Index 2013. It’s not surprising, then, that these markets are generating interest from companies playing in the global trade arena.
The popularity of outsourced manufacturing spurred the initial boom in transportation of goods to and from developing nations. China and India became the first big players by luring western companies with lower labor and production costs. But while the two countries still attract the lion’s share of outsourced manufacturing business from companies in the developed world, the tide may be shifting.
“Global trade is never static; it is always evolving,” says Essa Al-Saleh, president and CEO, global integrated logistics, for Agility, a global third-party logistics (3PL) provider with U.S. headquarters in Irvine, Calif.
While China and India will remain dominant for many years because of their strong manufacturing base, they are not immune to competition. China confronts rising labor costs, a skills shortage, and a growing gap in income disparity, while India struggles with weak infrastructure and bureaucracy. As a result, many companies are seeking alternate production locations.
“Near-sourcing is on the rise, with companies moving manufacturing closer to their own markets,” Al-Saleh explains. “Mexico and Turkey, for example, have become attractive production locations for the U.S. and European markets, respectively. And, factories outside China are growing, so the hotspots for production will continue to evolve.”
Indeed, 62 percent of trade and logistics professionals surveyed for the Logistics Index see production moving away from China to other emerging markets.
High-tech companies, in particular, are continually evaluating their sourcing and manufacturing locations. “Because of the high-tech industry’s extremely competitive nature, these companies need to secure lower costs while maintaining quality,” Al-Saleh says. “They want to relocate manufacturing to emerging areas where they can gain greater cost advantage.”
Thick as a BRIC
Among the emerging market hotspots, the BRIC countries (Brazil, Russia, India, and China) remain the most dominant for investors, exporters, consumer goods producers, and logistics providers, according to the Logistics Index, which ranks nations based on three metrics: market size and growth attractiveness (50 percent of overall score); market compatibility (25 percent); and market connectedness (25 percent).
“For the second consecutive year, logistics and trade professionals ranked Brazil, Russia, India, and China as the likely places to emerge as logistics hubs over the next five years,” the Index notes. But an increasingly competitive group of second-tier markets is emerging: Saudi Arabia, Indonesia, the United Arab Emirates, Malaysia, Mexico, and Turkey are all attracting logistics and trade professionals.
Other high-rising nations in the 2013 Index include Indonesia, which climbed to the fifth-ranked spot from 10th last year; Bangladesh, which shot to the 12th spot from 25th; and Thailand, which rose to 14th from 29th.
A variety of factors can create buzz about a country’s potential as an outsourcing location. Kazakhstan, Argentina, Morocco, and Ukraine all climbed into the 2013 Index‘s top 20 rankings for the first time. An improvement in the overall economy drove the increase for Kazakhstan and Argentina; while Morocco climbed as a result of an increase in foreign direct investment; and Ukraine registered security improvements.
Vietnam and the Latin American countries have become attractive production locations for the apparel and textile industries. “The driving forces behind the popularity of these emerging markets include availability of raw materials, attractive labor costs, tariff reductions from participation in free trade agreements, and attractive country incentives,” explains Susan Cantone, director of imports and customs brokerage at Geodis Wilson, a global freight management firm with U.S. headquarters in Iselin, N.J.
New Market Growth
In addition to providing opportunities as prime manufacturing locations, emerging nations also offer potential as new markets for the consumption of goods from developed nations.
“Huge gains have occurred in exports from the developed world into emerging markets,” says Al-Saleh. “The BRIC nations, in particular, have young and growing populations, and consumers there are becoming wealthier.”
Brazil, in particular, is a shining star. The country boasts Latin America’s largest economy, and ranks as the United States’ eighth-largest goods trading partner. In 2011, U.S. goods and services trade with Brazil totaled $103 billion, with U.S. goods exports to Brazil totaling $42.9 billion, up 21.2 percent from 2010, and a whopping 180 percent from 2000, according to the Office of the U.S. Trade Representative.
Pilot Freight Services, a global transportation and logistics provider headquartered in Lima, Pa., has invested heavily in setting up carrier agreements in Brazil to meet growing demand from shippers wanting to export goods to the Latin American hotspot.
“Brazil’s upper class is becoming quite wealthy, which has opened up a strong market for luxury goods,” says Jerod Hudnall, vice president of international sales for Pilot Freight Services. As an example, he cites the company’s recent experience helping a high-end U.S. furniture company open its first showroom in Brazil. Pilot also has seen an uptick in shipments of communications equipment, textiles, automotive, and aerospace goods to and from Brazil.
Russian consumers have also begun to pique the interest of companies in the developed world, thanks to the nation’s acceptance into the World Trade Organization (WTO) last year. The resultant loosening of trade barriers could set off the beginning of a strong consumer class in Russia, akin to the market that has developed in China since its WTO membership in 2001. U.S. companies are cautiously optimistic about the possibility of an increased consumer market in Russia, Hudnall says.
Africa is another location that has become a surprising growth area. The continent is not yet ripe for rapid consumer goods growth, and too much corruption and uncertainty still exist for it to become a manufacturing base, but in certain sectors of Africa, business is increasing. Oil and energy-based development, in particular, has been strong. Pilot has also transported numerous shipments of broadcast communication and telecommunications equipment to African countries.
Government-related business provided the catalyst for Pilot’s services in Africa. A few years ago, the company began transporting mosquito nets and spray for USAID projects. After establishing relationships and building distribution channels for these missions, the 3PL realized it could service commercial needs as well.
“We developed partner agreements in Africa—concentrated in Dar es Salaam and Mombasa on the East Coast, and Lagos on the West Coast—for government projects, which has given us a pre-existing footprint for commercial goods,” Hudnall says. “We can offer door-to-door service, and commercial business in those channels is picking up. We now transport goods to Africa weekly, so it has been a worthwhile investment.”
Challenges Abound
Transporting goods to Brazil, Russia, Africa, or any other emerging market, however, is not without challenges. The scale and scope of infrastructure, trading partners, and security measures; as well as the geopolitical climate, social and economic conditions, and physical location vary greatly—and have a large impact on the ease of shipping goods to and from their borders.
As a whole, trade with emerging or developing nations is not likely to follow the same patterns and procedures as more established trading nations. “The biggest mistake companies make when they begin shipping to emerging nations is trying to apply the methodologies, timelines, and expectations they are used to from other markets,” says Al-Saleh. “They need to be patient and persistent.”
Different rules and requirements also apply. “Emerging markets are more challenging because of complex import/export regulations, increased costs, and the business nuances of moving service parts within a country,” says Sam Mikles, COO of Flash Global Logistics, a Mountain Lakes, N.J.-based global aftermarket service parts logistics provider. “More rigor and scrutiny is required than in other places.”
When Flash sends mission-critical service parts to customer locations in Saudi Arabia, for example, the local chamber of commerce must inspect and formally stamp the goods before they even leave the United States. The country also maintains strict licensing requirements, so if a replacement part contains encryption software, for instance, Flash must include a specific license for that type of import in advance of shipment.
“We may have to show proof of payment or prove the import is for warranty replacement purposes,” Mikles says. “This lets Saudi officials know that a customer in Saudi Arabia paid for the goods or is providing local maintenance support, and that we are not importing parts for resale.”
These types of customs and security concerns are common when trading with developing nations. “Customs compliance issues are among the most frustrating factors in trade with emerging nations, because their customs regulations and documentation requirements are inconsistent, and often change frequently,” Mikles says.
“We draw too many parallels between the way U.S. Customs functions and how we think customs in other countries will function,” he adds. “That attitude can leave you open to scrutiny in other countries.”
For example, a shipment with a commercial invoice listing a weight that is off by one kilogram, or a shipment with a piece count that is off slightly, will not cause problems with customs in the United States, but could cause substantial issues in developing nations.
Sidestepping Snafus
A variety of potential snafus also await shippers importing goods to the United States from emerging nations. In addition to the risks of getting goods from the manufacturer to the vessel, shippers should expect increased scrutiny from U.S. Customs and Border Protection (CBP) on shipments entering the United States from developing nations.
“Many emerging markets do not have security programs reciprocal to the United States’ Customs-Trade Partnership Against Terrorism (C-TPAT) initiative, so shipments coming from these countries often undergo intensive import exams, which can delay shipments and increase costs,” Cantone says. “In addition, when the countries are part of free trade agreements with the United States, the shipments often require additional documentation. CBP will look carefully for fraudulent tariff information or invalid claims.”
Shippers entering emerging markets also need to adjust their transit time expectations. Overall, transit time will be longer to emerging markets than to developed nations; and within the emerging markets, delivery times will vary greatly based on each nation’s sophistication.
“Shipments flying into Sao Paulo, Brazil, have plenty of options for a drayage company to deliver a container, or a local cartage company to deliver pallets of air freight,” explains Hudnall. “But for shipments flying into Lagos, Nigeria, it might take a while to find a company willing to deliver the cargo, depending on the final destination.
“We set accurate expectations with shippers—and advise them to communicate those expectations to their customers,” he adds. “We also explain the logistics challenges in each specific area.”
If a shipper is warned in advance that transit time for a shipment released in Tanzania could be eight days, and it does take eight days, the transaction is viewed as successful. “But if a shipper is prepared for two-day delivery, and it takes eight days, the outcome is totally different,” Hudnall notes.
Another challenge shippers and providers must prepare for when trading with emerging nations is increased cargo security risk. While concerns about tampered or compromised shipments are valid, the responsibility lies largely in complying with federal rules and regulations. But the larger concern for companies beginning to trade in emerging markets is cargo theft.
Experienced service provider partners can help alleviate the risks. Pilot, for example, employs robust cargo theft-deterrent procedures when it sets up new offices or partnerships in developing nations.
“Our vetting process with possible partners includes scrutinizing their cargo security measures and facilities, and checking security certifications and membership in organizations such as C-TPAT,” Hudnall says. “We also visit their facilities.”
Taking a Risk
Understanding the specific risks certain countries hold is also crucial. “Our local partners need a strong hold on the threats and exposure in their own market,” Hudnall says. “We expect them to explain the key concerns and how they address them.”
Despite the risks and obstacles, however, many shippers are experiencing success in emerging markets. “Shippers can overcome these challenges,” says Mikles. “Companies can create a repeatable, predictable supply chain as they move into emerging markets. It’s not easy or simple, but it is possible.”
Finding logistics and transportation partners experienced in these markets is key. Companies attempting to go it alone when entering emerging markets are often served a disturbing wake-up call.
“Companies need a strong partner to execute successfully in these markets,” says Al-Saleh. “Experienced providers know what it takes to build a logistics center in Shanghai or India, and have the partnerships and people in place to pick up and deliver goods in Afghanistan.”
Whether it’s luxury items shipping to Brazil, telecommunications equipment moving to Africa, consumer goods en route to Russia, or merchandise coming into the United States from far-flung production locations, transportation to and from developing nations is on the rise. It’s not easy or simple to execute, but shippers—and their providers—are finding ways to get it done.
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Forklift manufacturer Toyota Materials Handling can testify to the importance of having a solid partner when entering developing nations. The company recently turned to freight forwarder Geodis Wilson to execute shipments into the emerging markets of Indonesia and Chile—and the transactions were completed without a hitch.
Geodis Wilson transported some of Toyota’s largest products—its 70,000-pound-capacity lift trucks—to distributors in both countries. “We introduced these models as new products, and hope to grow the Indonesia and Chile markets,” says Shannon Williams, export coordinator for Toyota Materials Handling.
The 3PL handles all transportation and customs issues, and keeps Williams informed of any problems. The company’s knowledge of the intricacies of trade in these areas is also a benefit.
“Geodis might suggest an alternate port that does not require as much documentation, for instance,” Williams explains. “Also, Geodis maintains its own agents in certain ports, which is a key security advantage.”
Indeed, making the unfamiliar more familiar is what conquering logistics in emerging nations is all about.