Although the emerging market sector is showing rapid growth, a large number of U.S. manufacturers are not meeting their business goals, according to a new study released Wednesday by the Deloitte Global Manufacturing Industry Group.
The report, "Innovation in Emerging Markets 2007 Annual Study," noted that just over half of the U.S. companies surveyed were extremely or very successful in achieving their revenue and operating goals in emerging markets.
Deloitte's study focused on the operational issues facing U.S. manufacturers who have established or expanded operations in five emerging markets: China, India, Southeast Asia, Latin America and Eastern Europe.
Among the executives surveyed, 59 percent said their companies have operations in China, more than a third had operations in Eastern Europe, Southeast Asia or Latin America, and just over a quarter had operations in India.
The companies that are the most successful in emerging markets have found that they must capitalize on local knowledge and respond to the special needs of the market to meet their business goals.
The survey revealed that these companies learn new skills and organizational procedures that are pertinent to the specific market; encourage autonomy to thrive locally, while leveraging the strengths of headquarters; and develop products that are lower in cost to meet the needs of buyers in emerging markets where there is a much lower GDP per capita.
According to Gary Coleman, managing director for the global manufacturing industry group and partner with Deloitte Consulting LLP in the U.S., a company cannot just take its North American, German or Japanese business model and relocate it to Russia, India or China and expect it to be as successful there.
Understanding local culture and local economics where a company does business is critical for a long-term sustainability and profitable growth, said Coleman.
Although manufacturing investment in emerging markets was originally done to lower costs through cheaper labor, materials and components, companies today are finding these areas to be sources of strategic growth, for products, services and innovation, the study shows.
Among the top five business reasons for investing in emerging markets, increasing revenues and market share came in first, with a rating of "extremely important" or "very important" by 84 percent of executives, while reducing costs ranked second (77 percent), followed by reducing time-to-market, diversifying revenue sources and accessing talent, according to the report
Due to this change in perception, companies are transferring more sophisticated operations, such as complex production, research and development, and sales and marketing, into emerging markets.
But similar to labor problems in developed markets, these operations require higher-skilled employees who are in short supply in emerging markets also. This is putting companies in competition to hire and retain the best workers, while dealing with high turnover rates and labor costs, the report said.
This means that manufacturers need to customize HR programs to the local culture, and this does not always translate to just offering the highest pay, the Deloitte Global Manufacturing Industry Group noted.
Key hiring and retention strategies in emerging markets are compensation, cited by 76 percent of U.S. executives surveyed; career opportunities, 68 percent; training incentives, 62 percent; and rewards and recognition, 51 percent.
U.S. manufacturers are facing other challenges in emerging markets, including how to protect intellectual property, legal and regulatory issues, and geopolitical issues. Deloitte suggests that these manufacturers should develop risk management programs to help them meet these challenges.
But the study shows that risk management implementation varies, as only 67 percent of U.S. executives surveyed said that their companies conducted a detailed risk assessment before entering an emerging market, and just 43 percent said their companies assessed risks for ongoing operations.