U.S. companies face both economic advantages and costly pitfalls when dealing with a BRIC country (Brazil, Russia, India and China). The use of logistics providers experienced in working in those emerging markets can help ensure they reap the former while avoiding the latter.
Consider these news stories from earlier this year:
• Citing a reorganization of its supply chain operations, Campbell Foods announced that it is exiting the Russian market completely but will continue exploring growth in China and other emerging markets.
• Labor actions and congestion problems temporarily shut down operations at four of India’s major container ports. Ocean carriers announced major hikes in shipping rates to and from the subcontinent, while port officials there have substantially raised fees.
• In May PIERS reported that Brazil container exports enjoyed a year-over-year increase of 25%, while in June it reported that U.S. exports to Brazil, primarily cotton, rose 20%.
• A number of reports have found that the trade balance with China has begun to shift, reflected in a marked increase in U.S. exports and decrease in imports, spurred by inflationary pressures in China and a declining U.S. dollar.
While you can’t prepare for every uncertainty, if you are going to trade with the BRIC countries you need to take steps in planning your supply chain operations to deal with many known challenges. One of those is material handling.
Handling Quality Control
Brett Mears, executive vice president of Palmer Logistics, has seen this first hand. Because his company is based in Houston, it primarily deals with chemical imports and some exports, but also has handled imported lumber and forest products, food products and consumer goods. Primarily a warehouse-based third-party logistics provider, the company also offers trucking, intermodal and freight brokering services through its Pioneer Freight division.
“The biggest issue on the import side is quality control and quality assurance,” Mears says. “We’ve seen our role as a third-party warehouse go from just a dummied-down, moving pallets through the facility, to more quality assurance. Our customers expect us now to receive material from India, China, Brazil and Russia and really audit the level of quality.”
In China one issue that has arisen is the extreme variability in the quality of pallets. There is such a great demand in China for pallets that because of the country’s limited freight handling infrastructure, good quality pallets can be in short supply. “One shipment may come in this week that is on an acceptable pallet, and then next week it may be on a pallet that a U.S. company may reject,” Mears says. “On the import side, we have had to step up to be more involved in quality assurance than to just be a warehouse.”
When exporting to those countries you also need to realize that they don’t employ the same kind of physical facilities that we take for granted in the U.S. After receiving reports of damage to shipments delivered to China and India, Mears investigated and asked for photos. He discovered that while his company was loading containers from a dock-high warehouse, many of the warehouses in China and India don’t employ facilities with the same features.
“They actually pulled the truck up, hooked a chain to the pallets and dragged them from the back of the container,” he notes. “We are stuffing a container tight with material and when it got over there we were seeing damage because they were pulling the pallets out of the container and they caught on its ridged walls. It’s skewing the pallets and they’re banging into the ones next to them.”
Be a Partner
Warehouse-based 3PLs also need the cooperation of their U.S. customer—the shipper—in these situations, Mears says. “In China and India, if somebody damages the product, they are expected to pay for that, so you also see a tendency for them not to admit that they damaged the product,” he adds. “We need photo evidence to show that the shipment was not damaged before the container is unloaded.”
That is another reason why it is important for exporting companies to partner with a 3PL that has experience in shipping to these countries, he says. “If they haven’t shipped there before, they will have an advantage in that we have shipped to those sites and know the pitfalls. You will minimize the number of added service needs, complaints and problems you’ll see.”
Dealing with a different set of issues is Mark DeFabis, president and CEO of Integrated Distribution Services, Inc., based in Plainfield, Ind., just outside Indianapolis. His company is helping customers in the retail goods market enter the direct-to-consumer market in BRIC countries opened up by the growth of the Internet in those nations and with it, online shopping.
In addition to offering a full range of warehousing and fulfillment services, IDS also provides its customers with a full range of transportation and freight management services, including management of rail intermodal, and domestic and international air and ocean transportation.
“We are seeing Internet access, especially high-speed Internet access, being more readily available than it has been in these emerging markets, making them attractive to a lot of the e-commerce companies,” DeFabis points out. Apparel and household products, including kitchen and bathroom supplies, are currently some of the fastest growing segments of this e-commerce marketplace.
For many producers of these items, the question is whether to export them directly to the BRIC countries, or establish operations within those countries from which to service customers. “3PL customers will need to give considerable thought about whether they will choose to service those markets from their U.S. operations or whether they should look at going in-country with services,” he says. “If they choose to not go in-country, they need to be prepared to do more exporting business direct to the consumer, which puts additional burdens on them that they may not be prepared for yet.”
That includes dealing with portions of the process such as handling Customs and in-country delivery services to the consumer, according to DeFabis. “Some of these emerging countries have a less-than-fully-developed infrastructure that would allow for delivery right to the consumer.”
He says this is where an experienced 3PL with long-standing business relationships with companies in those countries can help. “I think it is going to become increasingly important,” he adds. “On many of these issues, most customers will be looking to their current providers to help put forth solutions, and the more we can help them access these emerging markets, the more value we are bringing to the table for them.”
If a U.S. company is shipping apparel or other consumer products to Brazil that are made in China or India, do you source them directly from those countries or the U.S.? “I think you are going to see both, and therein lie some of the discussions e-commerce companies will need to have,” he says. “This is especially true for those traditional-line retailers that have both a physical retail presence and an online presence, where you have foreign-made products that are coming into the U.S. and being distributed to the domestic market.”
For example, DeFabis poses the question: “If you are trying to enter the Brazilian market and your materials are being made in India, do you want that to come through your channel in the U.S. and then back to Brazil, or do you set in place a direct-to-consumer channel that may be closer to that emerging market?”
As each of these countries develops at its own pace, that development is already beginning to reshape the global supply chain. “In China you will see fewer new plants opening,” Mears observes. “Obviously, the costs are going to come up over time and as your transportation costs increase, it’s not going to be as cost advantageous to open a plant in China as it was 10 or 12 years ago. You will see fewer new plants opening up strictly to export product to the rest of the world.”
What about Wages?
Rising wages in countries like China also offer an upside when it comes to exporting American goods, Mears says. “You will see marketers moving into those countries and trying to sell their goods in those markets more than they have.”
However, DeFabis agrees that at least in the near term China will be facing inflationary pressures that will make some of the other emerging markets more attractive as locations for manufacturing.
“This is especially true when you look at where transportation costs are going, where ocean freight capacity is going to be and other factors, including rising wages” he says. “There will be more of a concerted effort to look at shortening the supply chain in terms of manufacturing closer to your point of distribution. In Brazil I’ve already seen a lot of companies looking at trying to source in Brazil and Central America.”
Mears sees the same trend that is changing the business map in China eventually coming to the rest of the BRIC countries as well. “A lot of the growth in the BRIC countries has been because the First World has been building production sites and leveraging lower costs of doing business—specifically labor costs—within those regions,” he says.
“You are going to see a shift away from those countries being production sites and exporters to becoming consumers of goods. The wages are going to come up and while the Fortune 1000 companies—the big shippers—are slowing down the rate of adding production sites in the BRIC countries, they will still have to sell their products to those developing markets.”
David L. Sparkman is director of media and industry relations for the International Warehouse Logistics Association.