CIVETS and the transformational agenda

Mature markets are struggling and emerging and developing markets are becoming increasingly attractive to companies and investors looking for growth. Put this in perspective. Despite a 25% depreciation in sterling since 2007, only 4% of UK Exports go to the so called BRICs combined – this is less than the UK exports to Sweden! The developed world has woken up to the potential in emerging and developing markets. Now is the time to do something about it and that means more than BRICs. Where else and, what are the challenges that have to be faced?

The Economic Intelligence Unit coined the term Civets (Columbia; Indonesia; Vietnam; Egypt; Turkey and South Africa) in 2009 to refer to a second division of developing markets which will grow three times as fast as mature markets this year. The EIU predicts growth rates of .9 per cent for Civets countries over the next 20 years compared with 1.8 per cent for the G7 countries.  Although it was only established in 2007, the S&P CIVETS 60 index is ahead of the S&P BRIC 40 and S&P Emerging BMI over one and three years.

CIVETS countries all have large, young populations, with an average age of 27. This, or so the theory goes, they will benefit from fast-rising domestic consumption. CIVETS are also all fast-growing, relatively diverse economies, which means, unlike the BRICs, they should be less heavily dependent on external demand. This is a sketch and more details will follow in other blog posts on each CIVETS economy and, another group centred on Jim O’Neill of Goldman Sachs concept of the Second 11; the next eleven economies after the BRICs.  Meanwhile, here are some quick notes…

 

  • Colombia. Once the basket case of the drug barons it is fast becoming the poster child for growth. Using significant oil revenues 9third largest supplier to the USA) to fund infrastructure improvements (more Norway than Nigeria); there is a real drive to diversify the economy. Its population of almost 45 million is made up of 27% 0-14 year-olds and 67% 15-64 year-olds, giving it a median age of 28, compared with 40 for the US and UK.  Textiles, food processing, textiles and FMCG categories are building momentum with the consumer and, export potential. Otherwise, cement and aggregates; gold and emeralds offer heavier industry opportunities to match.
  • Indonesia. At 245.6 million, this is the largest Muslim country and, fourth most populous in the world with an average age of 28 years. Income has reached $3,464 per capita – up 15% from 2010. Business Monitor International predict that GDP growth will average 6.1 % through to 2015. Surprisingly, the modern retail sector is strong in populous areas with 37% market share – versus  6 to 10 % in India. Mobile phone penetration reached 48% in urban areas by 2009.
  • Vietnam.According to the World Bank’s in 2009 Vietnam’s GDP will growth 5.5% only, much lower than the expected 7.5%. By 1987, the private sector virtually did not exist in Vietnam. After 20 years of reform, Vietnam has put in place the fundamentals of a market economy and opened up the economy to international flow of capital and trades in goods and services. The emergence of the market-based economy with appropriate institutions, stable macroeconomic environment and the support of the government for business development have allowed Vietnam to unlock the potential of the agriculture sector, turning Vietnam from a food-hunger country to the world third largest rice exporter.By 1987, the private sector virtually did not exist in Vietnam. After 20 years of reform, Vietnam has put in place the fundamentals of a market economy and opened up the economy to international flow of capital and trades in goods and services. The emergence of the market-based economy with appropriate institutions, stable macroeconomic environment and the support of the government for business development have allowed Vietnam to unlock the potential of the agriculture sector, turning Vietnam from a food-hunger country to the world third largest rice exporter. Largely due to the War in the 1960s and 70s, this is a young country. Vietnam has however slowly begun to make inroads into regional Chinese dominance of low end manufacturing of items such as shoes and garments where low labor, welfare and operational costs are attracting foreign investors away from the rising costs in China. A study by the Japan External Trade Organization found that a Vietnamese manufacturing worker earned US$101 a month against US$217 in China.
  • Egypt. Has a big, young population—82 million strong and with a median age of 25. The Arab Spring has put a brake on progress but the legitimate protests have opened up interest in the wider marketplace. For example, Retail. However, political turmoil needs to settle and upcoming elections should put a perspective on the military role. As things stand, military control risks spilling over into a stifling of hard won freedoms as a means to protect vested interests. This will impact FDI and slow potential to a standstill. The prize remains: Egypt can play an increasingly crucial role as a bridge between East and West. Meanwhile, this morning, a BBC reporter asked a street trader: “How’s business?” “On one leg” came the reply. [BBC Radio 4, World At One, 22/11/11] The issue right now is the Army – who have been in a key role since 1952 and control an estimated 40 per cent of the economy.
  • Turkey.The bridge between east and west, the Turks have been at the edge of the EU debate and, must be thinking hard as Greece and the Euro Zone go deeper into crisis.Turkey’s business sector has achieved high growth over the past few years. However, Turkey has relatively few natural resources of its own, but it has a diversified economy as well as major natural gas pipeline projects which make it an important energy corridor between Europe and Central Asia. Some labour-intensive sectors lost competitiveness prior to the currency depreciation in mid-2006 and faced employment losses, raising political pressure for interventionist policies.Overcoming the duality between the formal and informal sectors should be a key concern and could be instructive for other Civets economies.
  • South Africa.The mantle of most developed country in Africa matters. And yet, it had the slowest growth of all Civets markets in 2010 and unemployment stands at around 25%.The latest World Economic Outlook from the International Monetary Fund noted: ‘A surge in unemployment, high household debt, low capacity utilisation, the slowdown in advanced economies, and substantial real exchange-rate appreciation are making for a hesitant recovery.’The IMF is forecasting growth of 3.4% in 2011 and 3.6% in 2012. Still, that compares favourably with the IMF’s 2012 outlook for US growth, put at 1.8%, and the UK, at 1.6%. South Africa’s fast-growing middle class makes domestic consumption a major opportunity – the retailer Walmart bought 51% of Massmart earlier this year

A common framework on Civets would look something like this.

1. Base Case. Ever investor wants to know what are the chances of doing viable and sustainable business in a given market.

  • Political stability. Egypt illustrates a point and all countries have to be closely monitored. The message has to hit home, corruption does not just protected vested interests; it deters FDI and sustainable growth.
  • Demography. These are all big populations but what is the youth factor and, how is gender handled.
  • Governance. Corruption and how this is handled is key.
  • Ease of doing business and visibility. International standards are needed to ensure that end-to-end global supply chains conform.
  • Informal / Formal mix. Few countries from mature markets understand this well but the informal market is responsible for 1.8 billion jobs worldwide. It is not all about crime and excessive official corruption from a formal Public Sector and Legal system often plays a far greater role in marginalising what could be legitimate activity.  The role of land title is crucial here. As a percentage of GDP, the Civets informal market size in 2009 was: Colombia, 39.4%; Indonesia, 19.1%; Vietnam, 15.7%; Egypt, 35%; Turkey, 40% and South Africa, 28.5%. This compares with the BRICs: Brazil, 39.8%; Russian Federation, 46.6%; India, 23.7% and China, 13.2%. See: Schneider & Buehn (2009). These are not small numbers.

2. Infrastructure. This is the Achilles heal of many emerging and developing markets. The impact is huge in mature markets – it is estimated that the ROI on every £1 spent on infrastructure is £3 – imagine what it can be elsewhere.

  • Hard. In India, and in Colombia the Economist noted: “the monumental backwardness of Colombia’s transport network is the biggest obstacle to economic growth.” The same applies in Vietnam whose textile industry has long suffered against Malaysian competition – due to a relative logistics weakness that nullifies low cost manufacturing on the route to market. While China remains significantly ahead of its neighbor in terms of supply-chain infrastructure, Vietnam is moving to address its weaknesses and the future growth of the nation will be dependent on how the government is able to address this key challenge.
  • Soft. Broadband is key to enabling rural as well as urban markets. In 2005, Indonesias nine largest cities had 8% internet connections- this has quadrupled. In 2009, three per cent of consumers said that they would buy on line. Now, this has risen to over 80 per cent.
  • Intermediate. This is the warehousing and truck fleets on the ground. More information is needed on this.

3. Modern and traditional market mix. All Civets have to respect the mix of traditional and modern. The nature of the appeal to youth markets is instructive. For example, advertising spend is up 39% YOY in Indonesia and this applies equally to modern and traditional outlets.

4. Logistics flows. These are the physical movement of goods; information and, cash flows.

  • Physical movement of goods. This is not all about state-of-the-art solutions. Where modern firms source from an eco-system of micro or SMEs, supply chains will be characterised by hybrid solutions from end-to-end.
  • Information flow. Cash flow. Places like Turkey have fewer than 40 per cent with bank accounts and so the potential to develop mobile solutions is significant.

5. Sector potential. Infrastructure; power; logistics and retail provide a useful platform for sustainable growth in all markets.

  • Infrastrutcure.The Pearl River Delta experience is instructive here. Today, this is the … Back at the time of the 1997 Hong Kong handover nothing could be further from reality. The plan was to create a cluster of construction companies that could serve the huge investments in infrastructure and pave the way for light manufacturing companies and electronics to follow – benefiting from critical mass; improved connectivity and market access beyond the Pearl River itself.
  • Chemicals. A key enabler of economic growth, as it is an integral part of heavy industries. The chemicals industry broadly covers the sectors of petrochemicals, fertilizers, basic chemicals, pesticides, industrial chemicals, pharmaco chemicals and consumer chemicals.
  • Retail. The key here is the nature and scale of the traditional trade. The mistake would be to see this as no more than a drive towards the modern. India proves that there is considerable potential in the traditional sectors.
  • Dairy. The Civets economies have more domestic than export potential. As such, dairy products will grow significantly. For example, Vietnam Dairy (Vinamilk), is well positioned to benefit from Vietnam’s 10% a year growth in demand for dairy products.
  • Skills and knowledge transfer. This is a key localisation strategy; a means to ensure that sustainable growth can be delivered by local actors and not just bought in migrant labour.

We then come to the agenda for logistics and supply chain thinking and practice in these markets. Each of the above Civets economies has a unique story. Above all, there is no homogenous solution to all at the same time. This is why we need to develop a research agenda on these markets to develop a more robust approach that can cope with an emerging modern sector; developing (not dying) traditional sector and a convergent set of needs to enable inclusive and sustainable growth.

This agenda will be of great use to multinationals seeking sustainable growth and not just short term sales boosts in these markets. Equally, for those countries ravaged by disease or natural disasters, a clear understanding of the dynamics of post emergency markets will play a major role in value for money on humanitarian efforts and, the ability to open up local markets to global opportunities.

This is a transformational agenda that is vital to international private enterprise as well as international funds supporting specific initiatives. It is not about the export of legacy “best practice” thinking from mature markets. It is all about fresh thinking where it is needed.

Article by: Rob Bell, Transformational Logistics Blog

 

 

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