Emerging market firms to spur growth of supply chains

21/05/2015 15:26 AST

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, according to a new report.

The ‘Chain reactions: How trade between emerging markets is reshaping global supply chains’ from the Economist Intelligence Unit, sponsored by Standard Chartered Bank, was based on a survey of 400 executives in eight emerging markets.

The study found that about 82 per cent of respondents said that over the next three years they will expand their supply chains in other emerging markets.

The cost advantages and productivity are important for emerging-market executives looking to expand their supplier networks in the developing world.

Among the respondents, 44 per cent cited operational efficiency as a reason why they were expanding their emerging-market supply chains, and 40 per cent said reducing costs.

The 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.

About 31 per cent 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 five per cent to 10 per cent in the next three years, compared with 17 per cent 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 said they planned to increase their supply chains to develop products tailored for emerging-market consumers.

The report also found 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 per cent said Central and South America was their top growth market in the past year, only 60 per cent 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.

Kevin Plumberg, the editor of the report, said: “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. As emerging-market consumers grow wealthier, they will demand more accountability and sustainability and this will drive firms to localise their supply chains.”

Trade Arabia