- THE MAGAZINE
A great many factors inspire firms to enter emerging markets — low-cost labor and newly affluent consumers being chief among them — but without a clear understanding of the transportation landscape in that market and how they will traverse it, that once “golden” opportunity may prove to have no clear value at all.
The challenge, the experts say, is in reconciling the firm’s strategic objectives and a stomach for risk when it comes to conditions on the ground and the way a particular market [and its government] functions.
For instance, while Brazil offers much in the way of promise — the World Bank deeming the country’s 40 percent increase in the size of its middle class as South America’s largest leap to prosperity — it also has a history of delivering “just in time” infrastructure.
This, obviously, is a disincentive to entry, especially compared to someplace like China, which has a long history of laying down roads and port connections in anticipation of future development.
But again, the choice a firm makes is ultimately dependant on its intentions: Whether it is eyeing a market to facilitate the flow of goods from manufacturer to final established market (extended supply chain management); to serve actual consumption in the emerging economy; or to reconfigure its supply chain in hopes of gaining a new set of efficiencies (near-shoring).
What do these issues look like from the perspective of a supply chain practitioner?
Prologis Inc., the multinational owner and developer of distribution facilities, is currently in 21 countries, many of which are firmly in the emerging camp, including the aforementioned China and Brazil, as well Mexico and Poland.
As Chris Caton, the company’s vice president and head of research explains, “When we look at emerging markets, what we’re really interested in is serving local consumption, even in a market like China, which of course is well established as a manufacturing center.
“That’s because at Prologis what we really focus on is bulk distribution and modern logistics facilities. That means, a lot of the time, our interest in a market has a lot to do with the nature of its retail sector and the affluence of its consumer base,” he adds.
“Typically, what we’re looking for is a retail market transitioning away from a mom-and-pop, stall-oriented retail distribution network to one that has more scale to it and is more consistent with global standards,” Caton continues. “In many instances, e-commerce is the tailwind that drives us into the market.”
Looking at Consumption
Prologis minimizes its exposure to transportation and other risks by being very selective about where it will locate a new logistics facility — typically choosing to focus its efforts only on major markets.
In China, that has meant restricting its activities to Shanghai, Beijing and a handful of first- and second-tier cities. In Brazil, it is hewing close to Rio and Sao Paulo.
According to Caton, when Prologis enters an emerging market, it is often at the behest of one of its existing customers.
“They come to us saying, ‘Hey, will you come with me to XYZ city or XYZ country?’ With that, the analysis of their particular situation begins — and there are a lot of challenges, not just transportation, that you have to consider.”
Among the first questions Prologis considers is where the market is on what Caton describes as the “natural arc” of its consumption growth. Then it looks at where that consumption is actually occurring.
“If you take China, for example, the GDP per capita on a country level is somewhere around $3,500, but in the cities it is considerably higher, probably between $15,000 and $20,000 GDP per capita, so that’s where you’re going to see demand for retail product and goods sourced from the global retail network,” he says.
Getting to the finer grain of considerations, the first hurdle a company is likely to grapple with is the level of construction expertise in the market, quality being a must in developing modern logistics facilities.
“Another necessary condition for our participation is a strong rule of law,” Caton points out. “Because we’re an asset-oriented business, the right of ownership has to be pretty strong before we’ll be comfortable entering an emerging market.”
Then come to subtler wrinkles, and this is where transportation issues often come into play.
“In Tokyo, for instance, our assets are closer to the city center than in other markets. You have to not only consider the road network, but even the types of trucks you can use, simply because of the way development has historically occurred there — and it is that kind of unique wrinkle you have to consider in each and every new market you enter.”
Connecting Site and Transportation
Chris Mazza, senior vice president of business development at web-based intermodal applications provider, International Asset Systems (IAS), described understanding how these kinds of issues impact your supply chain as “huge.”
A veteran of the ocean-carrier side of the business before entering the tech world, Mazza concerns over how to get raw materials in and finished products out of an emerging market drives factory placement decisions and, by extension, how the transportation networks that serve them are arranged.
“You need to look no further than the original Asian tiger, China, to see that in practice,” he explains. “Early on, because of concerns about how to get in and out of the country, everybody wanted their factory or manufacturing capacity right next to the port, and as close to the port as possible.
“But what China has done right is recognizing that the factors that brought manufacturers to it in the first place — cheap labor being at the top of the list — was not going to become less important to these companies. So they built out their road and rail systems in anticipation that businesses who set up shop there would eventually want to migrate further into the country in search of lower and lower labor costs.”
The other thing China did right during its earliest years as an emerging market was recognize that it did not have to invest in gimmicky high speed trains; far more important was to create infrastructure that would guarantee the reliability of supply chains.
“If I’m a manufacturer of widgets, and I know that if I produce it and get it packaged on Monday, I can get it on a container ship on Tuesday, that’s huge,” he says. “Even if it takes three or four days — as long as I know how long it will take, I can manage my supply chain effectively.
“So, when you look at an emerging market from a transportation perspective, that’s what you have to look for and that takes a bit of research and analysis. Is the transportation network you might be relying on safe? Are people constantly stealing goods transported across it? And what’s the safety record in the country? Are trains constantly crashing or the highways strewn with accidents?” Mazza asks.
“If I were considering entry into an emerging market, I’d have to be assured of a high degree of reliability and predictability in terms of the infrastructure network. Because if I miss the ship, it may not call again for another week, creating all kinds of headaches downstream in the supply chain,” he points out.
Mazza adds, “Considering how you are actually going to move freight in, out and around an emerging market may not be as important a consideration as base cost, but it is certainly pretty close.”
Examine Distribution Methods
While the reliability of a transportation network might seem like an obvious consideration, there are subtler factors impacting transportation and transportation decisions in emerging markets. One of these is the building stock in the prospective market.
Prologis’s Caton says there is a very bright line distinguishing what is usable and what is not, if one wants to effectively be part of the global supply chain.
“It’s different than in the U.S. which has had affluence for a long time and modern distribution methods in place for far longer than the markets we’ve been talking about,” he says. “In many of these emerging countries, a building 20 years old or more is likely not going to be adaptable to what your needs are today.”
Asked to elaborate, Caton says in many emerging markets ceiling height is an issue, as is loading dock door density.
“With just-in-time delivery and the velocity of supply chains today, the number of doors you have on your loading dock has to be sufficiently high to facilitate the flow of goods,” he points out.
Then, there’s floor loading to consider.
“In today’s market, the ability to rack up to 30 feet or higher has to be there... Oh, and then there’s the parking lot and truck port, which have to be large enough to accommodate modern trucks. In our experience, older facilities have none of these,” Caton says.
“Fortunately for us, we’re seeing a real nice structural tailwind created by the emergence of the consumer classes in these markets, year in and year out — almost irrespective of recession, and that’s creating an increased demand for our product.”
Speaking of experience on the ground in an emerging market, about this time last year IAS did a pilot project for a customer in China.
“What was interesting and new to us, is that we discovered the barge operators on the Yellow River in China are sophisticated participants in the supply chain and operate pretty much like trucking companies in the U.S.,” Mazza observes.
“When you look at this network, your first impression is that the vast majority of these companies are very small, operating no more than one or two barges, and that they don’t call at a lot of different locations,” he continues. “But what we found is that they’re very specialized operations, and that because they’re just the latest manifestation of a long-standing river culture, they really know the entire 1,400-plus miles they need to traverse and are incredibly reliable.”
“For us, and our client, the pilot was very informative, and the sense I came away with was that while in the U.S. we don’t have anything like the barge culture they have in China, they are actually a lot like what we see on the Mississippi River, where we’ve long moved grain and other goods in a very efficient matter.
“In terms of transportation in an emerging market, what we found through the pilot program was that accessing the barge network on the Yellow River is a very successful way to do it over there — it’s efficient, it’s easy and the people over there are used to it,” Mazza concludes.