Interview with Kishore Rao, Principal & Lead Consulting Partner for the Emerging Markets Practice, Deloitte Consulting LLC
A closer look at the factors contributing to slowing growth rates in Brazil, Russia, India and China offers insight on the next collection of emerging markets, as well as the established economies picking up the pace.
For quite some time the subset of countries known as the BRICs have been the primary targets of U.S. manufacturers looking for either less expensive production settings or a new market in which to grow. I recently sat down with Kishore Rao, principal and lead consulting partner for the Emerging Markets practice at Deloitte Consulting LLC to discuss their continued impact, and possible replacements.
Rao says that while the BRICs still have a lot to offer, there are a number of factors that have led to reduced growth rates amongst them. Accompanying this deceleration, other developing economies have emerged and become increasingly attractive to foreign investors. Additionally, as the BRICs have slowed and labor and infrastructure costs have increased, more established economies like the U.S., U.K. and Germany have become more competitive in attracting and retaining manufacturing.
Q: What are some of the common traits shared by the BRIC countries and other emerging markets?
A: Although they are different from each other in many ways, such as income per capita — China vs. India for example — one common trait is a soft infrastructure. This usually stems from governments that are still developing their capacity to properly regulate commerce, protect investors, promote infrastructure development and balance environmental considerations
Also, the government plays a strong, central role in these economies. This translates to a fair amount of corruption, red tape and bureaucracy that can make doing business in these countries difficult at times. On the positive side, this high level of government involvement means they are very aware of their current opportunities and work hard to establish economic benchmarks that appeal to foreign investment.
Q: Could you offer some perspective on the term “BRIC deceleration”?
A: Since the term BRIC was coined, these countries were expected to be the powerhouses of emerging markets, and in many instances they have been. However, in recent years they’re seeing GDP slowdowns, just like the west. India has slowed from seven to four percent GDP growth and China from 12 to seven percent. In both of these countries, manufacturing and exports have declined significantly. We’re seeing sharply reduced growth rates in Brazil and Russia as well, and that looks set continue.
Additionally, I think that one of the driving forces in establishing the BRICs wasn’t just the growth they were seeing, but the fact that they represent large consumer markets. Now, however, China and Russia are forecasting significant population declines, due in part to elements like the one child law in China and declining fertility rates in Russia. Really, only India still has a youthful and growing population and it continues to trend in the same fashion as established economies.
This population decline is a big issue for China and its global competitiveness — it’s not just about rising labor rates and energy costs. Access to a large pool of skilled workers is essential for continued growth. Skill shortages and rising costs have led companies seeking emerging opportunities to take a closer look at other Asian and increasingly, African markets, with the variables remaining constant — economic growth, the development of a middle class and population increases.
Q: Some add an “S” to BRIC for South Africa. What are your thoughts on adding South Africa to this list, or are there better countries to discuss when looking at emerging/growing markets?
A: I think it’s a little bit premature to add South Africa. On one hand, they are the largest economy in Africa — possibly larger than all the others put together — but it’s still smaller than all the other BRIC countries. Russia in particular is four or five times larger. A number of countries such as Indonesia, Malaysia, Philippines, Turkey, South Korea and Vietnam, among others, represent immediate opportunities for manufacturers.
South Africa is definitely an important longer-term opportunity. It has a relatively large population — 50 million people. What makes the country so important when discussing emerging markets is that it could be the key to accessing the African markets, which some feel represent the most significant growth potential over the next 20 years. Africa in general offers many of the largest developing economies and has a young population, growing middle class and increased number of stable democracies. These factors make it very appealing. However, the African marketplace is still very difficult to enter and service because it’s so fragmented.
In one of our 2013 Trends report articles, Building on the BRICs, we highlighted what could be the next big set of emerging markets, which includes the Philippines, Indonesia and Turkey. All of these countries are growing and, as a group, growing faster than the BRICs.
Q: Would the acronym be any different if the focus was exclusively focused on manufacturing growth/opportunity?
A: Many of the same countries would still be included, but manufacturing is definitely changing in some markets. Consumer goods production is moving from China to Vietnam, Thailand and Indonesia. Countries like South Africa have been very aggressive in targeting heavier manufacturing. So it really depends on what kind of manufacturing and where the end-user markets are located.
As discussed in our annual Competitiveness Report, China is still the manufacturing capital of the world, but we saw other countries significantly improving their competitiveness. These include the U.S., Korea, India and Mexico. Over last two years, the economic slow-down seen by the BRICs has translated to a resurgence of many established economies in Europe and around the world, including the U.K., Germany, the U.S. and Japan. It’s too soon to tell whether this is a long-lasting trend, or simply an economic cycle.
There are some interesting similarities between the BRICs and areas of the U.S., like the southeast. The same factors that drove manufacturers to look at emerging markets like China — more flexible work laws and lower labor rates — are also present in that geography. However, I think manufacturing growth in the Southeast is probably more attributable to lower transportation and logistics costs due to the proximity to shipping ports and lower and more stable energy costs in the U.S., due to the fracking revolution.
And with labor rates increasing in China, Mexico has actually gotten cheaper. Over the long run, energy costs in the U.S. will also become more attractive due to the recent natural gas and oil deposit discoveries.
Another issue is intellectual property protection in China and other markets. The combination of these and other factors have led certain industries to move back to the U.S. Unfortunately, this is just a drop in the bucket when comparing the thousands who have “reshored” versus the millions that left. The real conversation needs to center on capitalizing on these situations so it’s more than just a trend.
Q: What is the most important thing U.S. manufacturers could learn from these emerging markets/BRIC countries?
A: The thing that’s been amazing about these countries is that they have been pioneers in new models for innovation and collaboration. These countries have partnered with companies and invested in R&D at all levels in order to help companies create products that really mesh with consumer demands. That ability to invest and partner with universities, governments, suppliers and customer groups is one of the most important things we could learn. The R&D and innovation that has come from India has produced products that are cheaper than, but just as functional as those developed and produced in more established economies. They’re now in use in Western Europe and the U.S. More companies need to implement these types of hybrid business models.
Another big trend that is rampant in many developing economies is the level of customization and “co-creation” — manufacturers are producing specific products just for individual customer segments. The U.S. has the technology and supply chain reach to make that possible. Globally, the manufacturing process is changing significantly. U.S. manufacturers need to get closer to their customer base because that’s what will drive growth and investment.