LONDON: Emerging-market companies seeking growth further abroad will drive a steep increase in the size and complexity of their supply chains, as firms aim to control costs and cater to rising middle class populations in developing economies, says a new report from The Economist Intelligence Unit.
How trade between emerging markets is reshaping global supply chains, sponsored by Standard Chartered Bank, is based on a survey of 400 executives in eight emerging markets. The companies surveyed all were doing international business with other emerging markets. The study finds that 82% of respondents said that over the next three years they will expand their supply chains in other emerging markets.
Cost advantages and productivity are important for emerging-market executives looking to expand their supplier networks in the developing world. Among the respondents, 44% cited operational efficiency as a reason why they were expanding their emerging-market supply chains, and 40% said reducing costs.
Companies with the majority of their business from other emerging markets were more confident than those mostly dependent on advanced markets about seeing their costs decline in future. Around 31% of respondents from companies that derive half or more of their annual revenue from other emerging markets said they expected their production costs to decline by 5%-10% in the next three years, compared with 17% of companies with half or more of their revenue from advanced markets.
The need to understand and cater to the growing middle classes in these markets is also shaping emerging-market supply chains. Nearly a third of respondents (31%) said they planned to increase their supply chains to develop products tailored for emerging-market consumer
The report also finds that emerging-market multinational companies are becoming more ambitious globally, and more will look beyond their home regions for growth in the next few years. They are also turning their attention to emerging markets further afield, not advanced markets. These trends are most pronounced for Brazilian firms: while 90% said Central and South America was their top growth market in the past year, only 60% said the same region would be a top source of future growth in the next three years. More Brazilian companies are looking instead to Africa, the Middle East and South-east Asia.
“Ambitious emerging-market firms are developing supplier networks in other emerging markets to adapt to the specific tastes and needs of local customers, whose preferences are changing quickly,” Kevin Plumberg, the editor of the report, said.
“As emerging-market consumers grow wealthier, they will demand more accountability and sustainability and this will drive firms to localise their supply chains.”