Industryweek 14527 13256brazil

BRIC Crumbling?

Dec. 15, 2006
Corruption in Russia and a Brazilian economy that continues to protect domestic producers are just two reasons to question the investment attention U.S. manufacturers have been giving to the BRIC countries -- Brazil, Russia, India and China. But pulling o

Nordson Corp., a Westlake, Ohio-based maker of systems that apply adhesives, sealants and coatings during manufacturing, is considering increasing its presence in Russia, a country where corruption corrodes the business climate.

What is Edward P. Campbell, Nordson's chairman and CEO, thinking? Campbell is thinking strategically.

Nordson is "considering forming a direct subsidiary in Russia -- although we've not made a commitment to do so," says Campbell. "What we're talking about is a very limited investment; the exposure we would have is not large in financial terms," he stresses.

Nordson is considering a wholly owned subsidiary as a base for providing local service to its equipment customers in Russia and for partnering with some of its customers in developing specifications for next-generation Nordson products. "We're not talking about manufacturing; we're not talking about sourcing any components for our factories in the West," Campbell emphasizes. For about a decade, Nordson, an $838 million company with 67% of its sales outside the U.S. in 2005, has primarily served the Russian market from Europe, with its "direct investment" in Russia limited to not more than a couple of employees at any one time, Campbell notes.

For about five years, Russia has been one of the four so-called "BRIC" nations -- the others are Brazil, India and China -- that have attracted substantial interest, and sometimes substantial investment, from U.S.-based manufacturers. But with the Czech Republic, Poland, Hungary, Vietnam, and, again, Mexico emerging as significant markets and places of production, is BRIC crumbling? Not really. Rather there seems to be less hype and more reality about BRIC's place in a world in which manufacturers are chasing lower costs of production and distribution and seeking new markets.

Update, By Country

Brazil. Has a history of high inflation, high interest rates and high import duties to protect domestic industry. But "the macroeconomic climate has been fairly stable . . . under [President Luiz In cia] Lula [da Silva]," notes Thomas Duesterberg, president and CEO of Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group with about 450 member companies.

The ethanol industry is growing, and Brazil has a lot of iron ore, to which the Chinese increasingly are trying to get access, says Duesterberg. Nordson has had sales and service operations in Brazil for 15 years, but no manufacturing.

Brazil is closer to the U.S. than China, meaning goods arrive faster, but the cost of labor is higher because of Brazil's currently booming economy, says Kurt Cavano, CEO of New York-based TradeCard Inc., a firm that offers technologies to automate trade transactions. Brazil is in the same time zones as the U.S., meaning "you don't have to be up all night or have an agent there," he adds.

Auto companies and consumer packaged goods producers have built operations in Brazil, and "they've been fairly successful," observes Kevin Prouty, senior director for manufacturing solutions at Symbol Technologies Inc., a Boston-based provider of mobility solutions. Brazil is "just such a large, economically stable population you really can't ignore it," he asserts. The country is a "reasonably good" place in the long run, adds Conrad Winkler, a Chicago-based vice president of consulting firm Booz Allen Hamilton who focuses on manufacturing and supply chain strategies.

Russia. "A good choice" if you're shipping into Europe rather than the U.S., believes TradeCard's Cavano. "Probably not a low-cost producer for [manufacturers in] the United States, [but] it would probably be a low-cost producer for Western Europe," says Symbol's Prouty.

Russia's big negatives are logistics problems and organized crime, states Cavano. The Russians "appear to want to control the extractive industries pretty closely. [And] even some of the other major industries, like telecommunications, appear in recent years to have come under the sway of the authorities, the groups closely tied to the centers of political power," says the Manufacturers Alliance's Duesterberg. "We hear very little among our members about investment in Russia," he relates.

Of the four BRIC countries, the risk of the government taking away a company's business -- or that someone will take away the business and the government won't protect the company -- is probably highest in Russia, believes Booz Allen's Winkler.

Outside the energy sector, U.S. companies have been slow to locate in Russia, confirms Dan McCarthy, distinguished professor of global management and innovation at Northeastern University's School of Business in Boston. "For the most part, because of the obsolete condition of the manufacturing sector in general in Russia, [U.S. manufacturers] have to go in through another [company's] greenfield [investment]," adds Sheila Puffer, another professor at Northeastern's business school.

India. Of the four BRIC countries, India "has the most long-term potential," claims Prouty. "They have a fairly stable economy. They still have a significant amount of protectionism in place, but that slowly has been loosening. In the next 10 to 12 years you will probably see [India] outpace China in true manufacturing economic growth -- both as a low-cost producer and as a consumer."

Nordson has had sales and service operations in India for a decade -- and has added product development and software development activities. But for Nordson, India represents lower rates of demand and growth for its products than does China.

"Indian companies have accepted the fact that they are never going to catch the Chinese on low-cost manufacturing," says Michael Treacy, a founder and chief strategy officer at Boston-based Gen3 Partners Inc. "India is challenged by basic infrastructure issues like roads," cautions Manoj Kumar, a Mountain View, Calif.-based director of PRTM Management Consultants. TradeCard's Cavano agrees, noting difficulties in getting goods off the coast. Then there's the distance from the U.S., he adds. Having a reliable power supply is another issue, adds Booz Allen's Winkler.

China. "China clearly is the most mature outsourcing location for manufacturing today," contends PRTM's Kumar. In China, labor is cheap, logistics between China and the U.S. are good, and in China there are partners U.S. manufacturers can work with "to make things happen," states TradeCard's Cavano. What's more, "if you're selling components for goods that are going to get re-exported," China is a pretty easy place from which to get your money out," he judges.

During the past five years or so, China has been creating more scientists and engineers, and that's starting to draw more foreign direct investment in R&D centers than the other three BRIC countries, says New York-based Gary Coleman, global managing director, manufacturing industries, at Deloitte Services LLP. And as a consumer market, "blink an eye and China will be Hong Kong," says Gen3's Treacy.

On the other hand, China "is really far away," which puts the supply chain at added risk from such events as natural disasters and port closures, Cavano warns.

"China has said it does not want to be just a low-cost producer for manufacturing. So they've started to make it a little more difficult to invest in manufacturing in China," states Symbol's Prouty. Another negative: China "is still a dictatorship," reminds Deloitte's Coleman. "The laws can be rewritten overnight."

Beyond BRIC

Nordson's Campbell continues to see "good rates of growth" for its products in Mexico and in Spain, where he reports "excellent growth . . . on a consistent basis."

"Mexico is a very attractive way to serve the U.S. market with any product that needs to be made to order. It is a very effective low-cost location. It's so close to whole swaths of the U.S. market like the Southwest, Texas and California," says Winkler. "I don't expect electronics to come back to Mexico, but for other industries it could make a lot of sense -- building products, automotive supplies," he says.

Where To Locate?

The questions you need to ask to assess risk.

1. What is the socio-economic climate of the region like? What's the work ethic? How about skills? Can I get good labor? Is labor reliable? What is the pay rate?

2. Is the area safe from terrorists? Are employees likely to be affected by diseases and pandemics? Is this an area that encounters floods, hurricanes and tsunamis frequently?

3. What transportation modes are available in, out and around the region? Roads? Rail? Seaports? Airports? How reliable is the power grid?

4. What sources of supply are available? Are they of the quality you need to make your products? Are they reliable? Need to qualify a secondary source? Does the length of the supply chain create reliability, time and cost issues?

5. What's the legal and regulatory environment? How stable is the government? What's the extent of ownership allowed? Taxation? Duties? How about intellectual property rights -- and their enforcement?

"If you have larger components that have obvious shipping constraints, then maybe you ought to think about sourcing closer to home" than China, adds Pittsburgh-based Pat Furey, senior category manager in the global sourcing operations at Ariba Inc., a technology-based business-to-business services firm.

Among Manufacturers Alliance/MAPI members, "the Czech Republic seems to be a favorite place," says Duesterberg. "We hear more and more about Poland because it's not a bad environment and the domestic market is big," he adds. "Interestingly enough we hear a bit about the so-called Baltics -- Estonia, Latvia and Lithuania. All have surprisingly good governance, with maybe Estonia coming out on top. [They have] low taxes and a lighter hand on regulations."

"We are hearing a bit more about southeast Asia, especially Vietnam," Duesterberg continues. "Low cost. Big domestic market. Still very poor, but increasingly attractive in terms of its stability. Economy growing. Large population so it can be something of an export platform. Think about the potential domestic market as well." He doesn't think Vietnam will develop into another Asian Tiger, but that being said, "Vietnam is going to start to grow pretty fast." Symbol's Prouty foresees some of the low cost of production investment in China being shifted to Vietnam.

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