Category Archives: Industry

EMERGING MARKET SUPPLY CHAINS–LESSONS FOR INVESTORS

In my last post I gave an overview of the issues raised at a conference on supply chain risks and opportunities. Let’s now drill down a bit to consider how US and other western companies should address these issues as they being emerging and frontier market firms into their supply chains.

DUE DILIGENCE

Prior to any investment or contracting arrangement, companies will conduct the usual financial & operational due diligence to get an understanding of the nature of their investment. In doing so they should be mindful of several concerns:

  • Have suppliers and other 3rd parties had online compliance training?
  • Banks must comply with US financial regulations and so do their suppliers. Banks and other US companies must prepare suppliers to be audited by US bank examiners.
  • US & Western companies must maintain their “social license” to operate. This requires a deliberate demonstration of corporate social responsibility and should do all they can to purge human trafficking, child labor and other human rights issues from the supply chain.

SUPPLY CHAIN RISK

  • The current approach of international insurers to risk management is to understand the interconnectivity of risk. Experts recommend managing risks holistically rather than in silos. This holistic approach recognizes how operational risks impact legal risks and financial risks.

CORRUPTION

Western executives often complain of corruption and having to pay bribes in order to do business in emerging markets. (Of course for many westerners the answers is to pay bribes—it takes two to tango!) For US companies the Foreign Corrupt Practices Act means a jail sentence if caught making inappropriate payments. Cultivate long term relationship The strategies recommended by the experts at the EFMA conference and elsewhere boil down to the following:

  • Cultivate a long term relationship with suppliers to form a basis for trust. Building trust requires playing the long game so companies should budget for the time and resources required to form a long term relationship with suppliers and other stakeholders. It takes spending time in country. The desired outcome is a local partner for the long haul.
  • Get the incentives right. This includes not only sharing financial benefits, but also providing knowledge transfer via training and collaboration.

SUPPLY CHAIN DISPUTES

  • Implement controls that encourage performance and foster a long term relationship with suppliers.
  • Choose the right jurisdiction in which to set up the business entity and to contest disputes.
  • If necessary, seek advice on how to exit a market while retaining as much value as possible, and minimizing the loss of goodwill.

INTERNATIONAL TAX PLANNING

  • The natural and quite understandable inclination of most multinationals large and small is to locate profit centers in low tax jurisdictions. Some of these low tax states are disparagingly labeled tax havens. It is also not surprising that governments around the world have pushed back against the practice now known as “Base Erosion and Profit Shifting” or BEPS. The Organization for Economic Cooperation and Development has been a leader in understanding the use of tax havens. Companies would be advised to consult the OECD’s guidelines on BEPS and transfer pricing and to heed the advice of tax consultants and attorneys when setting up supply chain relationships in emerging economies.
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Making Supply Chains Work in Emerging Markets

I recently attended the Emerging and Frontier Markets Association’s conference on Supply Chain Risks and Rewards in Emerging Markets. I have long stressed the need for developing countries to move away from the model of natural resource dependence and reorient their economies toward value added industry and join the global supply chains that are the backbone of many key industries. This was the right forum at the right time.

The stage was set with a discussion of key risk areas companies face when emerging market companies become part of their supply chain. They are:

  1. Various forms of corruption—particularly the risk of violation of the Foreign Corrupt Practices Act and
  2. Working with companies that may be involved in human trafficking and other human rights violations.

Other important topics included due diligence, taxes and cyber security. These topics and others will help us understand what companies and governments in emerging markets can do to attract investment capital and join a global supply chain. The discussions also gave us some ideas on how Western companies can succeed in these markets where the opportunities are tantalizing and the risks are readily apparent. I’m looking forward to exploring the path to supply chain readiness in the blogosphere and in the real world marketplace.

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Africa’s Global Competitiveness–4 Themes to Consider

1. Is the commodity supercycle turning back upward?

  • Oil seems to have bottomed. After falling to the high 20s West Texas oil is close to $50 a barrel. Latest forecasts expect a plateau around $60
  • Metals are soft but not falling fast with gold just under $1300/ounce and copper about $2.17/pound.
  • Coffee rising—ICO composite index up 15% this year
  • Cocoa down 13% this year though up 20% over the last 4 years

2. Global growth forecast is a lackluster 3.1%-Africa slows to 1.6%

  • Has Africa hit bottom at 1.6% growth? Slowdown due largely to slowdown in commodities and reduced imports by China. With oil and other commodities recovering African economies should return to above average growth.

3. Are African leaders prepared to take the policy steps necessary to liberate their economies from commodity dependence?

  • UNIDO’s 2016 Industrial Development Report report discusses the nature of African industrialization and why it has not progressed further. African industrial activities ends to be resource based and has a low and decreasing percentage of global manufacturing value added.
  • The Brookings Institution’s Learning to Compete project notes the virtuous circle in which productivity enables exports and exports raise productivity.
  • The clear implication is that governments must implement policies that increase productivity, promote exports, and reduce dependence on natural resources.

4. The dialogue has started—time for public and private sector action!

  • Africa’s role in global value chains was discussed at this year’s IMF meetings.
  • EFMA Oct 13 conference on Supply Chain Risks in Emerging Markets will address challenges developing countries face in joining global supply chains.
  • We need policies that support sustainable growth and private sector investments that support these policies and offer favorable risk adjusted returns.
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