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Manufacturers are failing to maximize returns from emerging market investments, Deloitte study shows

Succeeding in rapidly growing emerging markets is becoming even more challenging

Sofia, 16 March, 2007 — Despite the size and remarkable growth of emerging markets, a surprising number of manufacturers are falling short of achieving their business goals, according to a new study by Deloitte’s Global Manufacturing Industry Group. Less than half of the companies surveyed reported being extremely or very successful in achieving their revenue goals and operating goals in emerging markets.
The study focused on the operational issues facing manufacturers who have established or expanded operations in five emerging markets: China, India, Southeast Asia, Latin America, and Eastern Europe. Among the executives surveyed, 59 percent said their companies have operations in China, more than a third had operations in Eastern Europe, Southeast Asia or Latin America, and just over a quarter had operations in India.
Companies that are achieving success in emerging markets are realizing the need to tailor their strategies to capitalize on local knowledge and respond to the unique needs of the market. To meet their business goals, the study also reveals that the most successful companies are:

  • Acquiring new skills and new organizational structures relevant to the specific market ?
  • Encouraging autonomy to thrive locally, while leveraging the strengths of headquarters ?
  • Developing products at lower costs to meet the needs of customers in emerging markets with much lower GDP per capita.

“A company cannot simply take its North American, German or Japanese business model and move it to Russia, India or China and expect it to be just as successful there,” said Gary Coleman, global managing director for manufacturing and partner with Deloitte Consulting LLP. “It’s not a case of duplicating what works in a developed market; it’s a case of building what will work in a specific emerging market. Understanding local culture and local economics in any market where you do significant business is critical for a company’s long-term sustainability and profitable growth.

” Manufacturing investment in emerging markets used to be largely about lowering costs through cheaper labor, materials and components. But today, Deloitte’s study concludes, companies see these regions as strategic growth markets, both for products and services as well as sources of innovation. According to the study, the number one reason for investment in emerging markets is to increase revenues and market share; which was rated as “extremely important” or “very important” by 84 percent of executives. Reducing costs ranked second (77 percent), followed by reducing time-to-market, diversifying revenue sources and accessing talent which rounded out the top five business factors.

As a result of this shift in perception, companies are moving more sophisticated operations into emerging markets, such as complex production, research and development, and sales and marketing. These kinds of operations require higher-skilled employees, which, just as in developed markets, are in short supply in emerging markets. Companies are competing to attract and retain talented workers and fighting the challenge to manage increasing turnover and labor costs rates.
Manufacturers must customize their human resource policies to local realities—and that doesn’t always mean simply offering the highest salary, Deloitte noted. Key hiring and retention strategies in emerging markets are training, cited by 63 percent of executives surveyed; compensation, also cited by 63 percent; career opportunities, 59 percent; rewards and recognition, 53 percent.

Beyond competition for skilled labor, manufacturers face other often unfamiliar challenges in emerging markets, such as how to protect intellectual property, legal and regulatory issues, and geopolitical issues. To that end, Deloitte says that manufacturers operating in emerging markets must become “Risk Intelligent Enterprises.” That means assessing all risks, then integrating those results into a single, comprehensive view. It is also critical to involve employees by making risk management part of the culture. In addition, manufacturers should assess risks periodically for ongoing operations in emerging markets, not just as part of the market entry decision.

However, the Deloitte study indicates that risk management implementation varies. For example, only 56 percent of executives surveyed said that their companies conducted a detailed risk assessment before entering an emerging market, and just 45 percent said their companies assessed risks for ongoing operations.

“The key here is to always remember your business’ core competencies and continuously adjust your strategies to make sure you are positioned for profitable growth,” said Coleman. “Our study indicates that companies are having a hard time adapting their headquarter policies and implementing customized methods of operation for emerging markets. As global operations become increasingly complex, manufacturers face the daunting task of integrating and managing all areas of the business. The winners are the companies that align their operations with the unique requirements of each location where they operate.”

Each of these issues is complex and presents unique challenges and opportunities. To view Deloitte’s Global Manufacturing Industry Group’s “Innovation in Emerging Markets 2007 Annual Study,” please visit www.deloitte.bg/manufacturing.

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