Emerging Markets: Mitigating risk as environments are redefined

According to the findings of the Agility Emerging Markets Logistics Index 2015, near-sourcing is clearly reshaping the fabric of global logistics and supply chain management practices, with many organizations endorsing a manufacturing and sourcing shift to locations closer to end markets.

Meanwhile, large BRICS nations—Brazil, Russia, India, China, and South Africa—have accounted for much of the growth and investment in emerging markets and have dominated the Index, which examines the resiliency and relative strength of those countries. At the same time, note analysts, Saudi Arabia climbed to No. 2 in the 2015, ranking behind only China, which has 47 times the population and 12.5 times the economic output.

Next tier economies Indonesia (No. 4), Nigeria (No. 27), Bangladesh (No. 28), and Pakistan (No. 25), all with populations topping 100 million, climbed in the Index rankings this year. The other large non-BRICS market, Mexico, held steady at No. 9.

Agility researchers observe that “dynamism” in ASEAN, Gulf Cooperation Council (GCC) countries, Sub-Saharan Africa, and the large, next—tier economies of Indonesia, Nigeria, Bangladesh, Mexico, and Pakistan is offsetting mixed performance in the BRICS countries that powered emerging markets growth in recent years.

Key findings
The Index, now in its sixth year, ranks emerging markets based on their size, business conditions, infrastructure, and other factors that make them attractive for investment by logistics services companies, air and ocean cargo carriers, freight intermediaries, and distribution organizations.

A few of the key, high level findings of the 2015 report include:

• Gulf states UAE, Qatar, and Oman ranked as having the best “market compatibility”—the most ideal business conditions—among the 45 countries in the Index. They were followed by Uruguay, Saudi Arabia, and Morocco.

• UAE, Malaysia, China, Oman, Saudi Arabia, and Chile led in “connectivity,” indicating that they have the best infrastructure and transport links.

• The Philippines climbed three spots to No. 16 in the data portion of the Index after jumping nine spots in 2014. The country also improved its standing among supply chain executives surveyed. They pushed the Philippines up five spots among the countries that they said would emerge as a major logistics market.

• Russia’s growing economic isolation has damaged its appeal to logistics and supply chain professionals. More than 75 percent of survey respondents said that they were pessimistic about Russia’s prospects.

• India continues to divide logistics and supply chain executives. They ranked India as the No. 2 choice to emerge as a major logistics market and ranked it relatively high—No. 17—among countries least likely to become a major logistics market. In the data portion of the Index, India was leapfrogged in 2014 by Brazil and Saudi Arabia, and it slipped again in the 2015 Index, falling past Indonesia to No. 5. India’s “market compatibility” deteriorated despite optimism about reform under new Prime Minister Narendra Modi.

• The fastest growing trade lanes linking emerging and developed
  markets were U.S.-Vietnam (up 42.7 percent by volume) and Cambodia-EU (up 41.9 percent) for air cargo, and Ukraine-EU (up 35.8 percent) and EU-Egypt (up 23.2 percent) for ocean shipments.

• For 2015, trade flows between Asia’s emerging markets and other emerging markets are the ones that had logistics and supply chain professionals most upbeat in the survey.

Taking an overall look at the this year’s report, Walter Kemmsies, chief economist with the consulting firm Moffatt and Nichol, notes that the Chinese economy, growing at 10 percent a year just a few years ago, is slowing and expected to grow at 6 percent to 7 percent a year. Meanwhile, labor strife damaged the South African economy in 2014, but has largely ended. Still, output, is expected to grow in South Africa at a modest 2.5 percent.

“The biggest challenges in 2015 are the slowdown in China, continued declines in commodity prices, and potential tightening of U.S. monetary policy,” says Kemmsies.

Risk management analysts for Citi Research agree, noting in a investment letter that these forces will continue to pressure emerging economies to find a “new model” for GDP growth.

“The biggest rewards will be for countries making the effort to introduce structural reforms,” says Kemmsies. He adds that trade arrangements, domestic financial freedom, labor, tax regimes, land use, and the clarity of property rights should all comprise this new model.

At the same time, the International Monetary Fund (IMF) has identified productivity improvement as the key to broader, faster growth in emerging markets. It has called on these marginal countries to “remove supply bottlenecks, boost productivity, and move up the ‘value chain’ in order to sustain growth.”

State of the “fragile five”
According to Essa Al-Saleh, president and CEO of Agility Global Integrated Logistics, a year ago there was talk of an emerging markets meltdown based on concerns about weakness in South Africa, Brazil, India, Turkey, and Indonesia—nations that were then being referred to as “the fragile five.”

However, the emerging markets in general turned out to be far more resilient—even vibrant—than expected despite continued sluggishness in the global economy, the Index maintains. IMF analysts support this observation by forecasting an average growth for the 45 countries featured in the Index at 4.57 percent.

John Manners-Bell, chief executive of London-based Transport Intelligence (Ti), the research firm that compiled the Index, is more circumspect, however. “Five years after the global recession, prospects for all economies, developed and emerging, are still unclear,” he says. “Economic fragility, a falling oil price, and increasing security concerns in Africa and the Middle East have created uncertainty.”

Yet, he too feels that interest remains high in even the most vulnerable members of the “fragile five,” despite some daunting challenges. “Global manufacturers, retailers, and their logistics service providers need to remain cognizant of the shifting dynamics within ‘the fragile five,’” says Manners-Bell. “But added infrastructure investment, expanding international trade, and increased domestic demand can turn things around quickly and in a positive way. Shippers must simply be prepared.”

How prepared are U.S. shippers?
Just how prepared U.S. multinationals are when it comes to entering emerging nations comes into question in a recent survey conducted by the IMD business school in Lausanne, Switzerland, and the Boston Consulting Group (BCG). Titled the Global Readiness Survey, it takes a detailed look at what separates the leaders from the laggards in globalization—and some of the findings are hardly reassuring.

“Over the past few decades, the rise of emerging markets, initially as sources of cheap labor and then as rapidly growing consumer markets and centers of capital investment and innovation, has caused most companies of size and stature to enlarge their global ambitions,” says Margaret Cording, an analyst for BCG.

But despite this concerted push to globalize, the survey shows that few companies are ready to build and run truly global organizations and operations. “Only about 10 percent of companies believe that they have the full complement of capabilities required to win overseas,” says Cording. “Most companies are barely mastering the basics.”

BCG maintains that shippers struggle with three specific areas overseas: strengthening their go-to-market, logistics, and other value-chain activities; aligning their organization to support the global agenda through the spread of best practices; and mastering mergers and acquisitions.

According to BCG analyst Shawn Fedun, line managers who run businesses or regions are much more pessimistic about their companies’ global readiness than headquarters staff. “Midsize companies are at the greatest risk in going global,” he says. “They’re less nimble than smaller companies and do not have the scale of larger ones, making true global success more unlikely.”