Emerging markets – still a risky business?

Manufacturers with operations in the emerging markets are failing to properly assess the risks posed to their business.

Manufacturers with operations in the emerging markets are failing to properly assess the risks posed to their business, says Sir Digby Jones, Senior Adviser to Deloitte.

In a podcast to coincide with the UK launch of Deloitte’s Innovation in Emerging Markets 2007 report, Sir Digby Jones and Jane Lodge, UK manufacturing group leader, discuss the vital areas for consideration before establishing operations in the emerging markets.

Deloitte’s study of 446 global manufacturers found just 56 percent of manufacturers conduct a very rigorous risk assessment before entering an emerging market.  Once operating in an emerging market, only 45 percent of executives conduct ongoing risk assessments. 

Jane Lodge said: ‘Manufacturers are not currently 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 upside potential.’

One of the main threats facing businesses operating in the emerging markets 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 also threatens to hinder the development of the market itself.

Sir Digby Jones, said: ‘The greatest threat to the development of robust IP protection in China, for example, is China herself.  The long term solution to IP theft is to get Chinese companies inventing 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 in emerging markets 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 employees they need.

Jane Lodge added: ‘It is no longer the case that skilled labour costs in China, for example, are cheap. As the demand for skilled labour has risen, so the cost has increased as the availability amongst the skilled group gets smaller, and manufacturers are having to re-assess their HR policies so that they retain their skilled labour.’

Almost half of the executives surveyed reported problems in hiring qualified managers and R&D personnel in China, while roughly 40 percent reported problems attracting sales/marketing staff, skilled production workers and engineers. Over 25 percent of executives reported difficulties in attracting qualified workers for these positions in most of the other emerging markets studied.  40 percent of executives had difficulties finding qualified R&D professionals in Latin America.

Sir Digby Jones added: ‘There are signs that the lack of availability of skilled workers is being addressed.  Each year, around 1.2 million engineers and scientists graduate from universities in China and India, triple the number ten years ago.  What will happen as workers in the emerging markets become more skilled is that new emerging markets will appear and the operations requiring unskilled workers will move there instead.  British manufacturers will need to be quick to spot these markets to remain ahead of the game.’

Jane Lodge concluded: ‘The emerging markets remain attractive to manufacturers and the signs indicated in the study show that more and more companies are setting up operations in the emerging 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.”

The podcast featuring Sir Digby Jones and Jane Lodge in conversation on the challenges faced by UK manufacturing by the emerging markets and the findings of the Innovation in Emerging Markets Annual Survey 2007 is now available on www.deloitte.co.uk/manufacturing.