Global Hot Spots 2008: Revealing Global Manufacturing's Best Kept Secrets

Global Hot Spots 2008: Revealing Global Manufacturing's Best Kept Secrets

When expanding your supply chains overseas, it's vital that you do your homework to understand a country's cultural and business practices.

Learning before you leap is how companies find success when seeking opportunities in global "hot spots" -- emerging areas of the world of strategic importance to manufacturers. Whether you are based in the United States and are setting up shop in Turkey or whether you are based in France and expanding to Morocco, do your homework.

"A large American company can do very well in Turkey if they understand both the financial practices and the workforce culture," says Andrew Hoard, president of Aslan International, a foreign trade education and consulting firm based in Ankara, Turkey.

The first order of financial acumen is deciphering the tax system, which is not always applied even-handedly across the board, says Hoard. American companies, used to a rigorous tax system and rigid Sarbanes-Oxley regulations, are intent on paying all taxes and reporting all of the necessary information. Turkish companies generally do not pay as close attention to payment schedules or the payroll.

Government incentives can be tricky as well, says Hoard. "Large print giveth but small print taketh away," he quips. The country is still struggling with legal issues. "If you compare Turkey to Germany or Norway we aren't as good in the legal area, but compared to India we look pretty good," he says.

Hoard's knowledge of the practices in Turkey stem from his experience working for a large manufacturing company that put down roots in Turkey and his time as an owner of a small manufacturing company. He spent 11 years with FNSS Savunma Sistemleri A.S., a joint venture currently owned by BAE Systems and Nurol, but was originally owned by FMC Corp. FNSS manufactures tracked military vehicles for sale in both Turkey and export. He then owned a small operation based in Ostim that produced naval air conditioning systems. After a change in business conditions he shut his plant down. "Honestly, it's very difficult for a foreigner to run a small operation here -- it was very different from running the larger operation," explains Hoard.

Another sticky point in business practices in Turkey is securing work permits. It is difficult to obtain them, says Hoard, pointing out that he knows of company owners who in fact don't have permits to work at their own facilities. The reason for this is that the country is divided on which direction it should be moving.

Istanbul, Turkey
"There is a mad dash toward Europe in parts of the society, which is countered by the other half that wants to hold back from Western influence. The country is largely Muslim, yet they are trying to join the EU," he says.

However, Turkey is quite actively seeking foreign investment. In 2007 foreign direct investment hit $22 billion, compared to $1.1 billion in 1995. The Istanbul Stock Exchange was the fifth best performing among emerging market countries. And Turkey's GDP growth rate was 4.5%.

As a member of the Customs Union in Europe, Turkey can export to Europe duty-free. The country also has free trade agreements with such countries as Israel, Hungary, Poland, the Czech Republic and Romania.

Europe as a whole has invested more in Turkey than has the United States. Hoard explains this is because Europeans don't consider it much of a risk. "Turkey is just a truck drive away [from most European countries], and Europeans are used to Turkish workers."

Overcoming Language Barriers

Managing a workforce in Turkey is complicated. There are highly qualified people in Istanbul and the best university in that city teaches only in English. "However, many of the skilled workers do not speak English," Hoard points out. "You need to have a Turkish-speaking person managing the factory."

There are also cultural differences that must be understood. For example, for older workers the boss is always right. But younger workers want to have more of a say in how things are run. "The trick is to allow respect for older workers yet empower the younger ones. Skillful management can achieve a good balance," explains Hoard.

Another workforce issue is that while graduates possess strong technical skills, they are not trained to be problem solvers. "Turks seem to prefer to work for American companies where their opinions are solicited by management. And American companies are impressed with how Turkish workers strive hard to achieve specific business goal," Hoard says. Looking at costs, the Turkish workforce is expensive compared to Vietnam or other low-wage countries.

Plentiful Source of Labor in Morocco

One country that isn't as divided about attracting foreign investors is Morocco. In fact through its 16 Regional Investment Centers and an "E-Government Cyber Network" linked to key government ministries, companies can easily traverse through business channels.

Government encouragement might be one reason that both the automotive and aerospace industries are flourishing in Morocco. According to the Moroccan American Trade and Investment Council, the automotive industry is made up of about 300 companies valued at $2.3 billion. The sub-contracting sector is made up of 75 specialized manufacturing and supply units representing nearly 30,000 jobs. The companies are primarily located on the Casablanca-Rabat border in the Tangiers free zone.

Auto parts production includes radiators, batteries, exhausts, tires and seats. Automotive suppliers doing business in Morocco include Delphi, Lear, Polydesign Systems, Midas, Valeo, Yaziki and Tata Industries.

The aeronautics parts manufacturing industry is comprised of 50 companies, including EADS Marco Aviation, ASI, Aircelle, DL Aerotechnologies and Atlas Production.

Government commitment is one reason Faurecia Seating Product group recently opened a new plant in Morocco. "Morocco considers the automotive industry as a key industry sector for its economic development and is doing what is necessary to attract foreign investors such as Renault-Nissan and Sumitomo," explains Philippe Fleury, manager of industrial projects for Faurecia, a Tier One automotive supplier based in France. The company's new plant, located in the city of Kenitra, started production in October and serves customers such as Renault-Nissan and the Volkswagen Group.

The government offered Faurecia tax breaks over several years for the new plant and will participate in funding infrastructure expenses, including water, electricity, sewers and roads. Faurecia will also receive a contribution from the Hassan II fund for social and economic development.

Explaining why Faurecia, the second largest automotive supplier in Europe and eighth biggest worldwide, chose Morocco, Fleury says that the cost of direct labor was competitive. There are also over 25,000 unemployed people in Kenitra and the surrounding area, which allows for a plentiful source of labor in a country that historically was best known for its textile tradition.

Its close location to Europe helps Faurecia supply its just-in-time plants in Iberia and western France. The location of a greenfield site close to the freeway between the capital city of Rabat and Tangiers was another important consideration. This is especially true for Faurecia since it was unable to expand its existing plants and was having trouble recruiting for sites in Eastern Europe.

Additionally the infrastructure in Morocco is much better than expected, says Fleury. "In fact water, electricity, telecommunications, transportation and the main roads are up to Western standards. Obtaining authorizations for all of these utilities' is greatly facilitated by the Moroccan authorities."

High Return on Investment in Vietnam

If your company is looking for the most attractive investment in the emerging markets, look no further than Vietnam. The PricewaterhouseCoopers "Emerging Markets 20 Index" reports that Vietnam tops the list. "Vietnam is highly cost competitive and offers investors the highest potential returns," says the report.

Vietnam's ambitions go beyond attracting manufacturing due to low costs. "The government has stated its policy to attract complex manufacturing operations. They are actively benchmarking their policies against other countries that have developed before them," explains Peter Amaczi, director, PricewaterhouseCoopers Advisory Services, Vietnam.

Ho Chi Minh City, Vietnam
To achieve this goal the government is building up its workforce by sending its citizens abroad for training while simultaneously sponsoring scholarship programs to invite foreign students to work in Vietnam.

Understanding the workings of the labor force is integral to being successful in Vietnam, explains Amaczi. For example, strikes are legal and the workforce will use them as necessary, so companies must be willing to negotiate wages. On the other hand, Amaczi says that he often hears that workers are very committed to their employers as well as to the improvement of their country.

Conducting business in Vietnam requires an adjustment from Western standards. A good relationship with the local government is of utmost importance, advises Amaczi. "The country is changing so quickly that legislation becomes varied across geographical locations. The rules might be different from one province to another."

Infrastructure issues must be factored into any decision to set up shop in Vietnam. Amaczi points out that while the country is more developed than India in this regard, there are still issues to overcome. One is the lack of deep sea boat capabilities. The larger ships need to dock at Hong Kong. Roads and bridges need improvement, and electricity needs are growing more quickly than production.

Cultural expectations must be studied and understood. While bringing gifts for government contacts might seem odd to Westerners, Vietnam, like most of Asia, has its own customs that must be followed. Corruption is always an issue in developing countries and must be monitored as well.

But Amaczi sees great potential in Vietnam. "The opportunity is much greater than any obstacles. I suggest finding a local guide to help navigate the terrain," he says. A growing middle class represents strong consumer markets, and Vietnamese professionals earn very good wages and like their Western counterparts, are eager to purchase the latest -- and most expensive -- electronic gadgets.

Special Economic Zones in India

While Vietnam is a relatively new market, India is well along in its development. While much of that growth has been focused on IT companies, there's a growing tendency for manufacturing to call India home.

When asked about best practices on locating in India, Renuka Kathpla, director of India Development Service for management consulting firm Grant Thornton, says, "Research on India is very important. Things change drastically in terms of talent pool, infrastructure and adherence to laws."

Within India, companies must pay close attention to financial dealings. Kathpla suggests firms consider the following:

Foreign investment. Ownership is very important and therefore the ownership structure should be determined prior to locating in India. There are various restrictions in place, including possible minimum shareholder requirements to set up a company.

Taxes. Taxes play an important role in determining the bottom line, and in India both direct taxes (full exemption from corporate income tax for the first five years, 50% for the next five years and 50% of the profits plowed back for the next five years) and indirect taxes (central sales tax, service tax and excise duty) can be saved by setting up the facility in an earmarked Special Economic Zone (SEZ).

Setting up a SEZ. These have been established to promote exports as well as investment from domestic and foreign sources. Objectives include creating employment and building infrastructure. Some SEZs are in Mumbai, Chennai, and Delhi. An SEZ can offer many benefits, such as:

  • No license requires for imports;
  • Exemption from customs duty on import and central excise duty on procurement from domestic market of capital goods, raw materials, consumables and spares;
  • Supplies from Domestic Tariff Area to SEZ units are treated as deemed exports;
  • 100% direct foreign investment in the manufacturing sectors through automatic route; no cap on foreign investment for small scale industries reserved items.

Kathpla notes that by having the right information, a company can set up in shop in India in a very short time. "If you have the right documentation and right people guiding you, things can be streamlined. Also, many companies have started in India with a one-man shop but expanded very rapidly because of low costs as compared to other countries with exemption of direct and indirect taxes -- ultimately increasing the bottom line."

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