• Industry: Automotive, Industrial Manufacturing
  • Type: Survey report
  • Date: 6/4/2012

Emerging markets race up the value chain 

Emerging markets

Manufacturers in emerging markets are expected to ramp up their innovation activities at an even greater rate than their developed-market rivals as they seek to compete for higher-margin business.

One of the strongest trends to emerge from this year’s survey was the high level of innovation activity in emerging markets relative to developed markets. In all 10 of the innovation activities surveyed, respondents from emerging markets were more likely to say they expected to see an increase or significant increase in activity over a 12 to 24 month horizon, in some cases by a significant margin.

In the areas of radical innovation and fundamental research, for example, they were 10 percentage points and 14 percentage points ahead, respectively. The evidence is clear that emerging market manufacturers are seeking to compete with their developed-market rivals for higher-margin business.

One of the strongest trends to emerge from this year’s survey was the high level of innovation activity in emerging markets.

“We’re definitely increasing our innovation activity,” says a senior executive at Mahindra & Mahindra (M&M), one of the world’s biggest manufacturers of farm vehicles and equipment, headquartered in India. He explains that M&M has two main objectives for its innovation strategy: cutting costs and developing new products. “Emerging-market manufacturers like us have got to work hard to make sure we’re staying as cost competitive as possible because there are a lot of multinationals beginning to enter our markets,” he says.

The way M&M approaches innovation has become far more structured in recent years, he continues. “Until about three years ago, if we came up with a major innovation then it was often by fluke. Today, we’ve got cross-functional teams that work to specific targets and with much more accountability.” These teams vary depending on the project but typically include representatives from R&D, manufacturing, and quality assurance.

Case Study: India bucks the “boomerang effect”

High wage inflation in China, combined with recent supply chain shocks and high unemployment in developed countries, is persuading some developed-world manufacturers to move production closer to home – the so-called boomerang effect. This trend should gain momentum as wage costs become a smaller part of the overall cost of making and selling products.

Survey respondents expect the majority of their growth in the near term to come primarily from local markets (after the US, which was ranked the most likely source of growth). And they believe they will increase sourcing largely from local markets. Fifty-one percent of Asian firms plan to increase sourcing from China and 36 percent from India. For North American firms, by contrast, the top destinations are the US (33 percent) and Canada (27 percent).

One emerging market, however, has become massively more popular as a sourcing destination since last year among manufacturers worldwide. A large majority of respondents now say they intend to use India for a variety of activities (see chart).

Boomerang Effect

Of particular note is the rise in willingness of manufacturers to use India for high-value and commercially sensitive activities such as R&D and the production of goods involving significant IP. These data reflect not only recent progress in India as far as IP law is concerned but also that manufacturers from elsewhere regard it as a fast-growing market that requires localized products and services, and the production capacity to support its growing consumption.

As this report goes to press, the IMF has downgraded its forecast for India’s economic growth due to disappointing GDP figures (India’s growth rate slowed from 8.3 percent in Q4 2011 to 6.1 percent Q1 2012). Nonetheless, the aggregate spending power of India’s middle class is expected to surpass that of North America by 2023.

The country still has major problems to overcome, including a high rate of poverty, a dilapidated transport infrastructure, and evolving tax and trade policies. “Logistics is a challenge for us because we use a lot of smaller suppliers in various locations around India, and one stroke of government policy can change our supply chain scenario completely,” says a senior executive at Mahindra & Mahindra (M&M). “We have to work with some inventory, so this is one of the key areas in which we’re seeking to reduce cost.”

He’s not the only one: 58 percent of respondents from emerging markets seek to improve their logistics capabilities over the next 12 to 24 months – the most commonly cited strategy for improving supply chain efficiency after the improvement of manufacturing technologies and processes.


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