Almost half (47%) of 440 senior executives surveyed by the Deloitte Global Manufacturing Industry Group say their companies have been extremely or very successful in meeting revenue goals in emerging markets. The consulting company presented preliminary results of its annual study, “Innovation in Emerging Markets” in Davos, Switzerland, at the World Economic Forum.
“Companies are locating higher-value activities such as complex production, sophisticated research and development (R&D), and sales and marketing operations in emerging markets,” Said Gary Coleman, global managing director for manufacturing, and partner Deloitte & Touche USA LLP.“With this move, the challenge to provide innovative products and services that capture market share in the rapidly growing emerging markets intensifies. This intensity brings complexity, which for many companies makes it even more difficult for them to achieve their original emerging market goals.”
Although companies often begin in an emerging market with a joint venture or third-party arrangement, the study found that as they gain experience and become more comfortable more companies are using newly-created wholly-owned subsidiaries as their operating structure. Companies that have adopted this operating structure appear to be finding greater success in meeting their operational goals.
Of course, locating operations in emerging markets increases risk in a variety of areas such intellectual property protection, geopolitical issues, and legal/regulatory issues. Still, before investing in an emerging market, only 56% of companies surveyed conducted a detailed risk assessment. And even fewer (45%) conduct a detailed risk assessment for existing operations in emerging markets.
Additional research findings from the Deloitte study include:
- China continues to be the emerging market of greatest interest. Over the next five years, more than two-thirds of executives expect their company to locate or expand in China. Approximately 80% are likely to locate or expand both production and sales/distribution operations, while 44% are likely to locate or expand R&D operations in China over this period.
- Over the next five years roughly half of executives surveyed expect their companies to locate or expand in Eastern Europe, Southeast Asia, Latin America and India. For Eastern Europe, 81% plan to locate or expand sales/distribution operations and 43% will locate or expand production operations. Similarly, 72% of companies plan to locate or expand sales/distribution operations in Southeast Asia and 46% plan to invest in production facilities.
- Increasing revenues and market share are cited as the most important reasons for investing in emerging markets, followed by reducing costs, using low-cost suppliers, and achieving faster time to market.
- Only one out of four executives reported that their company had found it very difficult to attract qualified workers in China, India, Latin America, and Eastern Europe. In most markets, executives reported the greatest difficulties in attracting more skilled workers such as managerial, R&D, and sales/marketing people.
- Companies are most likely to conduct detailed risk assessments associated with supply chain, legal/regulatory issues, and business continuity. Risks due to geopolitical developments or terrorism are not examined in detail by most of the companies surveyed.
- Protecting intellectual property is one of the greatest concerns that companies have regarding their emerging market investments. Popular strategies for protecting intellectual property include: keeping high-value activities in developed markets, sourcing components from multiple emerging markets, distributing production across multiple emerging markets; and controlling access to proprietary information.
- The most popular operating structure in most locations for production and sales/distribution are newly-created operation subsidiaries (rather than an acquisition, joint venture, or outsourcing arrangement). This was particularly the case in China and Latin America where around two-thirds of companies surveyed preferring a newly-created operation.
- Operational costs were the most important factor driving the decision on which operating model to use (cited by 58%of executives surveyed). Other factors considered were time to market, legal/regulatory issues, local knowledge, need for control, and the amount of capital required.
The Global Manufacturing Industry Group of the member firms of Deloitte Touche Tohmatsu is comprised of more than 750 partners and 12,000 industry professionals in over 45 countries. Detailed results of Deloitte’s “Innovation in Emerging Markets. 2007 Annual Study” will reportedly be released in early March.