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28 May 2012

Rise of emerging economies changes the world trade map

Catherine Bolgar

Buyers are looking for complex and structured solutions in the supply chain that provide connectivity globally between themselves and their suppliers.

he evolution of supply chains is forging new trade corridors around the world,

creating new opportunities in emerging market economies. "It's not just about trade between for example China and the U.S. or

China and Europe. There are new strands of activity that are growing fast," says Adrian Rigby, Global Deputy Head of Trade and Receivables Finance for HSBC in London. "In more difficult economic times, businesses are reengineering themselves and hunting out new markets."

Many of the new opportunities arise in fast-growing emerging market

economies, especially those with expanding import and export markets. The trade aspect is important because it indicates a certain level of interconnectedness with global supply chains, as well as a certain threshold of infrastructure and regulatory development to make it possible to do business.

Opportunities for new business or growth of existing business may exist in markets that weren't very evident before the crisis
"You can't have network trade without industrialization," says Richard Kozul-

Wright, Head of the Unit on Economic Cooperation and Integration among Developing Countries at the United Nations Conference on Trade and Development (Unctad), in Geneva. Network trade accounts for more than 75% of total developing country trade, with China responsible for about 60% of that. Trade by low- and medium-income countries has increased to about 20% of world trade today from about 8% in the early 1990s. The trend of developing economies of the world trading between themselves, often called south-south trade, has picked up speed since the 2008 global economic crisis, says Przemyslaw Kowalski, Economist at the Organization for Economic Cooperation

and Development in Paris. Some developed countries still haven't recovered fully from the crisis, while othersmostly emerging market economiesdidn't dip as much and have fully recovered in trade.

That means that since the economic crisis, opportunities for new business or growth of existing business may exist in markets that weren't very evident before the crisis, Mr. Rigby of HSBC says. "Corridor creators" are what HSBC calls businesses that seek out the best trade partners to drive competitive advantage, regardless of location. The crisis just accelerated changes that had already started in global supply chains. Supply chains consist of four things: a supply source, a destination, an intermediate point and a final product, says ManMohan Sodhi, Professor of Operations and Supply Chain Management at the Cass Business School of the City University London. "Any combination of those is a supply chain," he says. "All of them are changing now."

Destinations are changingcountries that were supply sources have also started buying products, Dr. Sodhi says. Some are actually buying locally goods that also are produced for export, such as clothing made in India, and sold in India and Europe by an international retailer. Warehouses have sprung up to cater to the new supply chains.

Many sectors are seeing a shift from export-driven production to a mix of domestic consumption and exports, says Mr. Kozul-Wright of Unctad. "It will be interesting to see whether these value chains become more self-contained in

the developing world rather than depending on technology and markets in the north," he says. "If the developing world would like to maintain the kind of growth its had in the last decade, then value chains will have to have more local content than in the past." The top emerging growth importers between 2012 and 2016 are predicted to

be Egypt, with a 10% compound annual growth rate; Panama at 8.8%; Indonesia at 8.5%; Brazil at 8%; Peru at 7.7%; Russia at 7.4%; Argentina and India, both at 6.8%; China at 6.6% and Saudi Arabia at 6.3%, according to "HSBC Global Connections Trade Forecast Update," which HSBC published in February. Sources are changingcompanies that made their supply chains too lean got

burned by disruptions and are switching to a combination of long and short supply chains to reduce risk, Dr. Sodhi explains. They continue to source supplies from low-cost countries around the globe but they may also arrange for nearshoring, with a secondary supplier much closer. "They still have the old supply chain but now they have another one in addition to it," he says. Stephan Wagner, Professor of Logistics Management at the Swiss Federal Institute of Technology Zurich, known as ETH, also sees a move away from single sourcing, despite its cost advantages, toward diverse sourcing to reduce vulnerabilities. "Companies put suppliers in different regions to reduce risks such as exchange-rate risk or geographic risk." Another aspect of the sources also is changing: costs. Labor costs in coastal China have risen, prompting some companies to chase lower cost labor farther inland, or in other countries such as Vietnam, Cambodia or Sri Lanka, whose costs haven't risen as much. "Theres a new source and a new trade corridor," Dr. Sodhi says. The top emerging exporters to 2016, according to the HSBC report, are Egypt, with 9.26% growth; Panama at 9.5%; Paraguay at 8.8%; India at 7.5%; Australia at 7%; Colombia at 6.7%; China at 6.6%; Peru at 6.4%; Indonesia at 6.1% and Poland at 5.9%.

The intermediary point is changingthe Iceland volcano that disrupted air

traffic in 2010 made companies look at locations for transshipments of goods. And these intermodal hubs aren't necessarily manufacturing anything. "They say, bring it to my place and I'll route it further," Dr. Sodhi says. Some of these transshipment hubs include Dubai, Singapore, Rotterdam, Panama and Egypt. "In the future," says Dr. Wagner of ETH, "we will have more intraregional trade

and less trans-Atlantic and trans-Pacific trade." Southeast Asia, in particular, is poised for fast intraregional growth. "As a consequence, logistics firms need to build up strong capacity for regional trade," he adds. "You have to be able to run a logistics operation in China and not just ship parts from Asia to Europe and finished products from Europe to

Asia." The products are changingmost of the sectors forecast to have the fastest growth over the next five years are those that support world trade, HSBC says. Containers, packaging and plastics are expected to register 9% compound annual growth between now and 2016. Binding products for foundries, which are needed for infrastructure projects like roads and railways, are forecast to

rise 8.8%. Electrical energy, defined as all non-fossil fuel energy, is expected to be the fastest-growing sector, at 9.1%. The largest traded sectors now are oil and gas, petrochemicals and plastics, cars, electronics, pharmaceuticals and iron and steel. HSBC forecasts continued growth in all these, though it will be outstripped by the standout sectors mentioned above.

On a consumer goods level, products also are changing. The growing middle

class in countries like China, India, Thailand and other countries is driving sales of luxury goods. Now these countries, long the world's low-cost suppliers, are becoming the buyers for goods whose supply source might be Italy or France, Dr. Sodhi says.

Sometimes the change presents surprising challenges for companies. Some

European machinery companies have found that customers in emerging market economies are willing to settle for quality that's just good enough, if it means a lower price. "This can be problematic for companies that have a culture of high technology and high precision," Dr. Wagner of ETH says. "The customers don't need such high standards and arent willing to pay for it."

At the same time, companies in low-cost countries are increasingly engaging in research, development and engineering to develop their own products, rather than simply to manufacture what's been designed in traditional markets, he notes.

"Local or national companies are moving beyond their initial stages of just

copying products. They are also investing in engineering in developed markets," Dr. Wagner says. He sees cases of Chinese machinery companies buying

medium-size German engineering companies, for example. "It's the next step of the maturity curve," he says.

Foreign direct investment by OECD countries has contracted since 2008, notes

Mr. Kowalski of the OECD. But China and India "are heavily investing. Their role in foreign investment has grown dramatically." That leads to a fifth elementfinancewhich has evolved in the supply chain,

says Dr. Sodhi of Cass Business School. "Money is what makes global trade possible," he says. Global banks are now acting on behalf of buyers and paying suppliers directly.

Companies are looking for ways to manage risk in global supply chains,

particularly as they enter new markets, says Mr. Rigby of HSBC. Solutions

including trade credit insurance, guarantee structures and collection support are growing strongly. "Buyers are looking for complex and structured solutions in the supply chain that provide connectivity globally between themselves and their suppliers," he says. "We at HSBC are well-placed to meet that need."

Large buyers are increasingly seeking supply chain solutions, he says. These take a number of forms, depending on where trading partners seek to allocate and retain payment risk. Therefore flexibility of product solution is key. The risk also has diversified with the supply chain, bringing in more talk about before," Dr. Sodhi says.

counterparties. "Finance really creates a new diversification point that we didnt

Catherine Bolgar is an independent writer covering business and economics.