Deloitte consultants David N. Martin, Anand Sairam and Yesul Myung look at emerging markets and how these relate to growth expectations for the next three years. Opportunities are present; but with opportunities come challenges.

Emerging markets such as Brazil, Russia, India and China (the so called “BRIC” markets) are not new destinations to manufacturing companies. For many years manufacturers in general have been utilizing the low cost structure in these markets to compete on a global scale. However, two new trends emerge and are expected to increase in the coming three years:

  • Beyond the traditional cost advantage, manufacturers are expecting significant revenue growth to come from emerging markets
  • Manufacturers are eyeing growth beyond BRIC into other emerging markets across Latin America, Eastern Europe and Southeast Asia.

Deloitte recently surveyed hundreds of executives across industries around the world—nearly 240 of them manufacturing executives—asking about their plans for emerging markets and revenue growth.

In 2011, approximately one-third of the manufacturing companies surveyed generated greater than 30 percent of their global revenues from emerging markets. Looking to 2014, more than half—and we emphasize that amount—anticipate they will capture 30 percent or greater revenue (see figure 1).

The surveyed executives cited geographic expansion as key to revenue growth. Expectations varied by country and region, but it is clear that manufacturing companies are focused not only on BRIC but the next set of markets as well.
While many manufacturing companies continue to generate revenues from BRIC markets—77 percent generated revenue from China—a large number of companies are currently also generating revenues from Eastern Europe, Mexico, Central and South America (outside Brazil), as revealed in figure 2.

Given the current distribution of revenue, it is not surprising that many executives expect growth in markets other than BRIC. We asked them about their plans for revenue growth in key regions around the world and identified key differences within various manufacturing segments.

Beyond BRIC: What’s Hot

What markets will most likely be hot in 2014?

Latin America: The gap between Mexico and Argentina and the rest of the Latin America region is significant. In Latin America (outside Brazil), Mexico (61 percent) and Argentina (50 percent) emerge as the top picks for manufacturing companies to increase revenue over the next three years. The expectations are likely results from the economic maturity, infrastructure and existing experience base within these two countries.

Industry variations exist, however. Among process manufacturers surveyed, 81 percent cited Mexico as providing revenue opportunities. Only 58 percent expect growth in Argentina. For auto manufacturers, the revenue opportunity is much closer between Mexico and Argentina with executives citing expected growth of 70 and 65 percent, respectively (see figure 3).

Eastern Europe and Russia: Russia and Poland are the most favored destinations in this region for manufacturing companies. In the Deloitte survey, executives outside the manufacturing industry were less optimistic about their revenue growth prospects in Eastern Europe (only 34 percent). Most manufacturers’ years of experience in Russia/Commonwealth of Independent States (CIS) may have enabled them to overcome the challenges new entrants from outside the region face – such as infrastructure and protectionist policies.

Process and consumer products manufacturing are key industries driving growth. However, auto manufacturers expect the Czech Republic to provide significant growth (consider figure 4).

Southeast Asia: Compared to other regions, revenue growth expectations in Southeast Asia are more evenly distributed. Singapore, though well developed, lags behind Thailand, Indonesia, Vietnam and Malaysia. Lack of exposure of manufacturing industries may be a key reason executives are not targeting growth in Singapore. Process manufacturers prefer Vietnam, while auto and consumer products companies prefer Thailand over Indonesia (witness figure 5).

Growth Comes with Challenges

Capturing a share of the fast-growing economies in emerging markets is an alluring prospect. But while the opportunities are great, so are the complexities. To be successful, companies must confront and manage a variety of complex challenges.

As multinational companies enter and expand into emerging markets, they should promote their brands among customers to compete with existing local companies. The issues rated most often as very significant challenges by the surveyed manufacturing companies include:

  • Providing affordable products that meet consumer needs
  • Protectionist policies or government bureaucracy

At the other end of the spectrum, establishing local partnerships and infrastructure problems were generally not considered significant (look at figure 6).

Adequate IP protection was a key challenge highlighted for the surveyed manufacturing companies seeking growth in China, but it was not among the top five challenges cited for any other country.

Interestingly, in geographies outside of BRIC, where manufacturing companies are generating (and expect to continue generating) significant sales revenues, such as Mexico/Central America and Southeast Asia, the top challenges included providing affordable products that meet consumer needs and brand awareness. Process manufacturers responding to the survey, in particular, identified brand awareness as a top challenge.

The Path Forward

As many manufacturing companies look to emerging markets for increased growth, they navigate through challenges in many different ways. Companies are localizing their offerings and adapting their business models to better serve market needs. By establishing company owned distribution centers, providing local sales/service support centers, and designing market appropriate products – many are succeeding. Those employing local vendors and conducting advanced customer/consumer analysis locally also often enjoy a competitive advantage.

It is clear from our research that opportunities and challenges vary by region and by individual manufacturing sectors. We are encouraged to see greater numbers of companies shifting away from treating all emerging markets as one homogeneous opportunity. Understanding and addressing market-specific challenges rather than replicating existing, traditional business models appears to be the future for manufacturers aiming to grow in emerging markets.

David N. Martin is a principal in Deloitte Consulting LLP and the US market leader for corporate and business unit strategy. Anand Sairam is a manager and Yesul Myung is a consultant within Deloitte Consulting LLP’s strategy practice, focusing on corporate and business unit strategies for companies expanding into emerging markets. Sam Choudhary and Ajay Sreebhashyam also contributed to this article. To see the full report, visit www.deloitte.com/us/emergingmarketgrowthsurvey. As referenced in this article, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Visit www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. This article contains general information and Deloitte is not rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.