U.S. manufacturers failing to maximize returns from investments in emerging markets

The value of emerging economies isn't found simply in cheap labor, but in emerging product markets. But to be successful, U.S. manufacturers have to do more than simply export the prevailing business models used in developed markets. So says a new study by New York-based Deloitte Global Manufacturing Industry Group, whereby only half of companies that are tapping emerging markets view themselve...
By Staff June 1, 2007

The value of emerging economies isn’t found simply in cheap labor, but in emerging product markets. But to be successful, U.S. manufacturers have to do more than simply export the prevailing business models used in developed markets.

So says a new study by New York-based Deloitte Global Manufacturing Industry Group , whereby only half of companies that are tapping emerging markets view themselves as very successful in achieving the revenue and operating goals associated with expansion initiatives.

The study focused on the operational issues facing U.S. manufacturers with expanded operations in five emerging markets: China, India, Southeast Asia, Latin America, and Eastern Europe. Among those surveyed, 59 percent of companies have operations in China; more than a third have operations in Eastern Europe, Southeast Asia, or Latin America; and slightly more than a quarter have operations in India.

“In our 2007 report, for the first time in five years, the primary reason to enter emerging markets was not to lower costs, but to grow top-line revenues,” says Gary Coleman, global managing director of the Deloitte Touche Tohmatsu manufacturing practice. “This is driven by the sheer gross domestic product coming out of emerging markets, and the huge wealth creation in these markets. This is compared with developed countries where it is almost stagnate. Wealth is being created at a phenomenal rate in these markets.”

That said, it’s not all good news, Coleman adds.

“Notwithstanding how attractive these markets are, less than 50 percent of companies surveyed were successful in meeting their revenue or operating target,” says Coleman. The reason: They’re acquiring distribution channels and loading them with products that aren’t retailored to the unique requirements of the local markets. “They’re too expensive. The functionality doesn’t fit. Nobody wants them,” he says.

Those who are making money and hitting their targets are adapting to the local market and investing in the necessary organization infrastructure to be successful.

“We found more than 50 percent of those who were making money had developed R&D facilities in the markets they were entering,” explains Coleman, adding, “They invested in developing local sales and marketing capabilities.”

These companies also did the necessary risk assessment. “Emerging markets today mean less risk than before, because governments are becoming more friendly,” Coleman says—but due diligence is still essential in evaluating strategies.

One of the primary challenges involved with expansion into emerging markets is securing the necessary labor.

“The lack of skilled labor is a huge bottleneck,” Coleman says. “I probably visited 25 countries over the last 12 months, and I didn’t meet a single CEO who was happy with the quantity or quality of the labor pool. If you go into India to High Tech City, the billboards there don’t advertise products; they’re about employment opportunities. The war for talent is real, and it’s not going away.”