For manufacturers, the No. 1 rule-of-thumb when it comes to strategic sourcing in an up-and-coming region of the world: Get there before everyone else does. Timing is a significant factor since it advances exponentially in global hot spots. Put down some roots while these regions are still in the process of building their infrastructure and hammering out tax issues, regulations and business arrangements. Why? Because that's when the talent is available and hungry to work for you. As the market matures and more companies enter, wages will go up and key managers will start to jump ship. And the nature of global sourcing will take a different turn.
The level of talent often determines the type of manufacturing a particular country pursues. For example, Kenya has a well-educated, sophisticated workforce, according to analyst Peter Ryan of Datamonitor, and it wants to be thought of as a value-added country. "Kenya will take the low-cost manufacturing plants, but only as a loss leader," Ryan explains. "Kenya wants the innovative work."
Then there are countries like Vietnam that have a larger reach. "I call Vietnam the new tiger on the horizon," says Mark Minevich, CEO of Going Global Ventures Inc. "It has the ability to spread across all sectors -- from pure manufacturing to performing R&D for some of the largest companies in the world."
Notes Alex Bryant, president of East West Associates, "Vietnam has experienced a significant rise in direct foreign investment. These companies view Vietnam as a real alternative for establishing manufacturing and distribution centers, primarily for export."
To attract business, Vietnam has an aggressive program of corporate income tax incentives, Bryant notes. "This program involves up to four years of tax holiday following the first year of carried forward' profitability. Thereafter, the tax rate is half of the nominal tax rate for a period of up to seven years, with a total application period of up to 15 years. The nominal tax rate can be 10%, 15% or 20%, depending on the industry sector, investment classification and location. The standard tax rate is 28%."
Building up its infrastructure is a key goal for Vietnam, which has invested 10% of its GDP into electricity, water supply, seaport services and telecom, says Bryant.
Infrastructure improvements also include the "software," which is how David Ross, regional vice president, FedEx Corp., South Pacific, describes the rules and regulations, as well as the organizations themselves that are responsible for utilizing infrastructure assets and the rules of trade. "A key area of this software' is customs clearance," Ross points out. "Efficient customs clearance is vital to a functioning supply chain. Manufacturers can often get a product or component to the airport or the docks. However, if it sits in customs for days on end, supply chain management turns into a guessing game."
Vietnam is playing an increasingly important role in manufacturing, particularly in high tech, Ross adds. Electronics manufacturers with plants in Vietnam include Intel, Canon, NEC Tokin Electronics, Tatung, Spartronics, MiTac Precision Technology and Mechatronics Engineering Group. Overall, there are more than 300 manufacturing companies located in Vietnam.
After The (Iron) Curtain Falls
Eastern Europe is another "best-kept secret" that isn't so secret any more when it comes to manufacturing. But many of the countries of the former Soviet bloc face a labor shortage that has companies in Eastern Europe worried. The automotive sector alone is expected to attract roughly $6 billion worth of production over the next five years, according to a report from PricewaterhouseCoopers. But the concern is that the demand for workers exceeds the available supply of talent.
Adds Garry Kemp from logistics provider DHL, "In this part of the world the technical skills and education are outstanding. What is still developing is the ability to manage using softer skills."
In addition to labor issues, across Eastern Europe there are varying levels of efficiency in business environments. "The countries who have joined the European Union are pretty much up to speed in their customs practices, logistics and infrastructure. New entrants will take longer," says Steve McMichael, vice president of supplier management at logistics provider UPS.
New regulations arise constantly. "In addition to C-TPAT (Customs Trade Partnership Against Terrorism), there is now the 10 Plus 2 [security initiative], which requires more visibility further upstream. There are going to be 10 data elements, which will be required of importers prior to customs clearance," explains McMichael.
When a country joins the EU, customs change overnight. In Bulgaria and Romania, for example, a lot of money is going into connecting highways and other forms of transportation, Kemp notes. He singles out Romania as a good location for warehousing and distribution. "Now is the time to get in."
The Ukraine is another global hot spot seeing an influx of foreign interest and activity due to its large consumer population and educated workforce, says Kemp. The infrastructure is there and will be smoothed out as government policies sort themselves out. Logistics is a problem, however, in Bulgaria and Russia in terms of finding warehouses for manufacturers or distributors, he observes. "It's hard to get property as things are uncertain and committing to long-term contracts is difficult. But I think these issues will be resolved soon." Vehicles, roads and airports lag behind Western standards at this point. A lack of standard regulations also hampers some of the Eastern European nations.
Russia is quickly catching up, though. Already active in energy, steel and railroads, Russia wants to increase its share of vehicle manufacturing from 12% in 2006 to 18% in 2015, Agence France-Presse reports.
St. Petersburg is seeing a lot of activity from the automotive sector, with General Motors, Ford and Toyota investing there. The ports are good and the labor is relatively cheap; however, salaries are increasing at a rate of 30% per year, according to Kemp, and he believes that unions will establish themselves in Russia.
In general, Russia wants to increase its overall manufacturing capability and not rely solely on energy. A recent World Bank report notes, "Investment in manufacturing stood at only 4% higher in the first quarter of 2007 than in the same period of 2006."
Into And Out Of Africa
Though seemingly at the virtual end of the earth, South Africa is another country emerging as a manufacturing hub, again, largely thanks to the automotive sector. The country's Motor Industry Development Programme is focused on supporting automotive OEMs and component makers. Most of the automobiles assembled in South Africa are exported, leading to a government policy called the U.S. African Growth and Opportunity Act that is helping to open up the American market for South Africa.
Automakers with plants in South Africa include Volkswagen, BMW, Daimler, Ford, Hyundai, Nissan and Toyota. There are also more than 200 component manufacturers in the country. According to the National Association of Automotive Component and Allied Manufacturers, South Africa's share of global production rose from 0.79% in 2005 to 0.85% in 2006. The automotive sector contributed 7.5% of South Africa's gross domestic product in 2006.
South Africa has the advantage of a good education system and is a leader from a technology point of view, explains Going Global Ventures' Minevich. "South Africa will be able to leverage its position and become a country of innovation in the future."
There are, however, some important business issues in South Africa that need to be addressed and corrected, such as unreliable electricity supply, inflexible labor laws and a high crime rate. These concerns caused South Africa to drop six places over the past two years on the 2007 Africa Competitive Report compiled by the World Economic Forum, World Bank and African Development Bank.
Egypt has the advantages of good ports and air services, with a large labor supply that is less expensive than South Africa, explains Minevich. "There are a lot of educated people in Egypt, and they are trying to find their place in the world." A major segment of the population is middle class, he adds. Egypt's government is investing in high-growth areas and is providing tax incentives. "I see rapid growth there over the next five to 10 years," he predicts. Already there are 276 manufacturing companies in Egypt.
Another African country seeing an influx of investment is Kenya. "Kenya has a ways to go regarding transportation, and it's not ready for value-added work at this point. The country is concentrating right now on small businesses," says Minevich. Kenya currently has 17 manufacturing companies.
In Africa, as across the rest of the emerging countries, timing will play an important role for companies looking to get the optimal efficiency from these offshore locations. For those companies seeking "early mover" advantages, locking up local talent at reasonable wages now is part of the trade off that comes with a willingness to accept less-than-world-class work conditions.
For more articles on this topic see Innovation In Global Hot Spots.