Investing in emerging economies is still a risky business for manufacturers, says Jane Lodge.

The role of emerging markets in the global economy continues to change at a ferocious pace. Yet despite the size and remarkable growth of these markets, a surprising number of companies fall short of their goals. So what is preventing them from fulfilling these aims?

Most likely, it is because business complexity continues to increase and it's a daunting task to manage emerging market operations, Manufacturers with operations in these countries are failing to properly assess the risks .

So what are the vital areas for consideration before establishing operations in emerging markets?

Deloitte recently carried out a study of 446 global manufacturers in 31 countries, focusing specifically on the operational approaches being used in China, India, south-east Asia, Latin America and Eastern Europe. It found just 56 per cent of companies conduct a rigorous risk assessment before entering an emerging market, and once operating in one only 45 per cent of executives carry out ongoing appraisals.

Managing risks

Manufacturers are not geared up to view risk holistically. Success in emerging markets requires an intelligent approach to managing the risks necessary to drive future growth, while avoiding risks that have no growth possibilities.

One of the main threats is intellectual property (IP) theft. But a third of businesses currently do not conduct a very rigorous assessment of this issue before entering an emerging market. However, IP theft is not only a threat to manufacturers entering a new market, it is also a threat which can hinder the development of the market itself.

The greatest threat to robust IP protection in China, for example, is the country itself. The long-term solution to IP theft is to get Chinese companies developing products which will force it to realise it has to afford protection to its own companies and embark upon litigation enforcement. The rules are already in place but are not being enforced.

Another element of risk concerns the availability of skilled employees. As increasing numbers of manufacturers locate higher-value operations in emerging markets, they are beginning to find it more difficult to attract the skilled staff they need.

It is no longer the case that skilled labour costs in China, for example, are cheap. As the demand [for skilled staff] has risen, so the cost has increased as the availability among the skilled group gets smaller, and manufacturers are having to re-assess their human resources (HR) policies to retain this workforce.

Almost half of the executives surveyed reported problems in hiring qualified managers and R&D personnel in China, while roughly 40 per cent said there was difficulty attracting sales/marketing staff, skilled production workers and engineers. Problems were also identified in other markets, including India and Latin America.

There are signs that the lack of availability of skilled staff is being addressed. Each year, around 1.2 million engineers and scientists graduate from Chinese and Indian universities — three times the number 10 years ago.

What will happen as workers in the emerging markets become more skilled is that new ones will appear and the operations requiring unskilled workers will move there instead. UK manufacturers will need to be quick to spot these markets to remain ahead of the game.

Local realities

To win this war for talent, companies need to customise their HR policies to local realities, while also recognising that it may not always come down to offering the most money.

In China and India, for example, training was cited as an important HR strategy — even more often than compensation. In south-east Asia, by contrast, rewards and recognition was named most often. Tailoring HR policies, therefore, requires creativity and a sophisticated understanding of each market.

Notwithstanding the challenges that emerging markets pose, some firms are successful. Nearly 30 per cent of the executives surveyed said their companies produced higher profit margins in such markets than they did in developed ones.

But emerging markets remain attractive to manufacturers and the signs indicated in the study show that more companies are setting up operations in these markets, close to their customer base. This is in stark contrast to a decade ago when joint ventures between companies were prevalent.

but the survey highlights that manufacturers must take action to assess the potential risk prior to developing their operations and continually review these risks to ensure continued success.

Jane Lodge is head of manufacturing at Deloitte