“Stockmarket bubbles often take a genuine improvement in economic or corporate performance, and then vastly overestimate its effect.”
So began a recent article in The Economist, explaining the run-up and subsequent fall in equity prices within emerging market bourses, leaving many investors questioning whether “they had been suckered into giving developing countries the benefit of the doubt”.
Many business practitioners (buyers, supply chain executives and others) may be asking the same question – what with the issues that such markets have seen over the past year (contaminants and quality issues in China, spikes in oil prices beyond anything we have historically seen (albeit somewhat abated), logistics price escalations, wage increases, etc.). Indeed, a number of observers are asking the question as to whether the practice of offshoring and outsourcing to emerging markets still has ‘legs’ or whether we should be rethinking the practice.
While there are no black or white answers to this question (despite the fact that we are in an election year!) and that the right answer will undoubtedly vary from company to company, it is worthwhile debating this question in the context of several market truisms today:
Truism #1: Globalization is the reality – our economic environment has evolved. We no longer operate in parochial entities but rather must interact with counterparts beyond our borders. This is not an altruistic practice but an economic necessity – talent, capability as well as the growing consumer wallet are not geographically constrained. Indeed, for many markets (both B2B and B2C), the real growth markets are no longer in western, developed economies. Compounding this reality is the fact that the concept of the vertically integrated entity is, for the most part, dead. Organizations that operate on the principle that they must do it all themselves are, quite simply, not operating as optimally as they can and should.
Hence, organizations of any size or merit must have a global (or at least international) footprint. This applies from both the marketing and operational perspectives. Furthermore, those that don’t are working hard to establish one. This is not simply because of the economic opportunity presented outside of our home markets but also because of the availability of talent across the world. The US is not alone in breeding the best and brightest talent, and it is critical that progressive organizations tap into these capabilities wherever they are available.
Truism #2: Arbitrage exists and will continue to drive behavior – yes, costs have gone up. Wage inflation has hit the developing markets, as have oil price increases and commodity price jumps. There are categories where the arbitrage value has shrunk on a pure cost basis. For some companies, this may cause a shift in strategy.
However, it is important to build a total cost picture of the effects of the various changes on the arbitrage topic. This total view encompasses not only the actual dollar cost of the purchased product/service, but also the relative productivity provided by the outsourced operation, the differential in product/service quality and the long term channel-to-innovation provided through the outsourced relationship (by allowing each party to focus on what they do best, they are able to develop and grow their offerings to take advantage of the relative innovations within their own markets, and hence benefiting the other party in the relationship). Looked at from this point of view, an coupled with the reality of globalization and price movements in developed markets, arbitrage will remain a key influencer of purchase behavior for the foreseeable future and beyond.
Truism #3: Darwinism is alive and well in Emerging Markets – the arguments to the above, not withstanding, the issues we have seen in emerging markets (including the quality issues) are very real issues and, while never excusing them, are not historically unexpected. Indeed, industry growth has almost always seen periods of intense growth, marked by a surplus of competitors, intense price pressures, and the chase for scale. This invariably leads some companies to adopt ‘shortcuts’ and less rigorous quality processes, and hence we see the types of serious problems that we have witnessed to date.
What we are witnessing now is a public backlash that will force stricter processes and operating changes. This will enforce a culling process that, over time, will sort out the quality players from the “me-toos” – resulting in a more sound and stable industry base for customers to do business with on a commercial basis.
Truism #4: Long term partnerships are more important than lemming -l ike generalizations – much like the financial markets in recent weeks, emotions tend to run rampant in difficult times and responses, certainly at a public level, can be rash. At times like these, what is important in the long run, is to identify partners and relationships and build on those for the long run.
Successful companies are founded and grown, at all levels, on the back of solid relationships; of partnerships whereby both parties make the appropriate long term investments in each other (financial, process, or otherwise). Given that we are dealing in a global environment, such partners will invariably be located in all parts of the globe.
To put into context the rush to the Emerging Markets door that many are suggesting, The Economist article makes a pertinent observation – that despite the actual structural improvements in emerging market companies and economies (suggesting genuine economic improvement for the longer term), “just now, the markets are having none of it. That could present a buying opportunity.”
In considering their response to the recent emerging market pressures, supply chain and sourcing executives would do well to bear that in mind.
