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International Perspectives By Michael Diliberto

State of the Union, International Edition

M

y friends and I have a New Year’s Eve tradition. At our annual holiday party we each present a slideshow highlighting the major events and changes we experienced throughout our year. And so it feels appropriate, as we close out 2012 and welcome 2013, to look back at what we’ve done and ahead to what our future holds. It’s been a big year for Asia. Wages are on the rise, with wage growth rates not just steady, but accelerating. In some areas of China, wages are nearly doubling each year, Thailand has just raised the minimum wage by an unprecedented 40 percent, and Hong Kong has just approved a 7 percent increase. Wage growth in Asia is creating both challenges and opportunities. The challenge of rising wages is, of course, looking for ways to minimize the impact of those rising wages on the costs of our goods, while the opportunity lies in the newly minted middle-consumers created by these same rising wages. RISING WAGES: THE CHALLENGE The challenge manufacturers see on the horizon is that these rising wages have a direct impact on the cost of our manufactured goods. The solution is not necessarily to flee this market to one with lower labor costs, although that is an option. Another option is to combat rising wages through increases in efficiency, an area where many low-cost manufacturing markets have an opportunity for improvement. Many of the Western methods of increasing efficiency and lowering defect rates, including Six Sigma, TQM, 5S, and others have only begun to be practiced in most emerging markets. Visits with your foreign suppliers and factories may have once been focused primarily on quality control, but now may be the time to start looking at increasing their efficiency; an investment now will pay dividends long into the future. Another question being asked with increasing frequency is which country will

move in and become the “next China.” This is a tough question with an even tougher answer. No one country is going to move in and take China’s place. The infrastructure, size, and breath of capabilities contained within China cannot be easily duplicated. What comes after China is more likely an increasingly globalized manufacturing supply chain. What was an exception a decade ago has become the norm today. Having a global footprint is no longer the domain only of the Fortune 500—all companies now expect to be global corporate citizens.

we now have to ask them. Equally important is understanding that our options for outsourcing are growing quickly. We are all global companies serving global customers. RISING WAGES: THE OPPORTUNITY The burgeoning middle class now growing in China, Thailand, and other emerging markets is creating a consumer economy hungry for Western goods. They are ready to become customers of firms that offer goods and services higher up the value chain than what has previously been available to them. To sell Western goods in these markets requires an understanding of what these new customers value. As the luxury goods sector is finding, you can ride only so far on your name alone, and can only appeal to a certain number of customers through the cachet of being a foreign brand. Creating sustainable growth in new markets requires careful planning and adaptation to the needs of these new customers. Yum Brands now derives forty 40 percent of the company’s global revenue from China. Similarly, Starbucks has been on a continual growth trajectory, a feat that is doubly impressive in that China has not historically been a nation of coffee drinkers. While I would like to think that my frequent double-espresso orders at mainland Starbucks outlets are the primary contributing factor to their success, really it has been Starbucks’ ability to simultaneously bring a Western brand to China and adapt it for the local culture. As more firms expand beyond their domestic borders, they will have hopefully learned the lessons of those that failed to adapt to the local market. Home Depot and Best Buy are two of the most high-profile examples of retailers that moved into China attempting to use the same playbook that they used in their home markets. Both pulled out of China just a few years after they began, a painful and costly miscalculation in the demands of overseas consumers. Another sector feeling the pressure of
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“As the emerging

markets of the world transition from being our workshops to being our customers, the opportunities for expansion are near limitless.”

Previously, the savings in manufacturing costs derived from outsourcing were so great that we didn’t need to even consider our increased logistics costs, import duties, or the high price of maintaining a team of expats close to our factories. Now with both labor costs and international freight costs on the rise, the types of costs that must be considered have expanded dramatically. Moving into this newly globalized world demands that we spend far more time evaluating the total costs of each step in our supply chain. Is it better to source high-tech materials from China and Thailand and ship them to Bangladesh and Sri Lanka for assembly? Does the cost of freight outweigh the advantages of shipping completed retail displays from China to Mexico? What is more important than knowing the answers to these types of questions is knowing that

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having to adapt to the Chinese domestic market is the luxury goods sector. The luxury market in China is cooling, perhaps reflecting Chinese consumer fears about the state of their domestic economy as well as the international economies of the world. Whereas before luxury goods have succeeded in the Chinese market through the reputation of those goods being extremely high quality or foreign, now customers are asking why they must pay such a high price for goods that do not offer a significantly greater value compared to other Western brands now appearing in the market. Although recently a general slowing of consumer behavior is being felt across the board, many non-luxury retailers are continuing to show a commitment to the Chinese market in their expansion plans. Success in the non-luxury sector is adaptation to the demands of the local market. Yum brands and Starbucks are finding success in China through adaptation

to local market demands. The popularity of KFC egg tarts and Starbucks green tea smoothies is a testament to retailers that have been rewarded for their ability to cater to local market tastes. In the business-to-business environment, local market expectations demand adaptation by Western firms looking to sell into the Chinese market. As an example, selling retail fixtures in China often brings with it a completely different set of customer expectations. Some customers may demand low prices, but are often expecting lower quality, especially compared with what would be acceptable in U.S. or European markets. As with sourcing from overseas factories, the most important activity when beginning a new customer relationship is setting the expectations clearly from the outset. NEAR LIMITLESS OPPORTUNITIES 2012 was an exciting year for the growth of foreign domestic markets, and 2013 is

already shaping up to be even better. Consider this: A recent HSBC report concluded that more than 80 percent of the population of the world lives in areas that are currently classified as “emerging.” As the emerging markets of the world transition from being our workshops to being our customers, the opportunities for expansion are near limitless. These new consumer markets will need stores to shop in, displays for those stores, and goods to put on display. If you’re reading this magazine the odds are good that you fit into at least one of those three categories, and I am here to tell you that a world of opportunity awaits you just outside your borders. Mike Diliberto is general manager, China, for Bloomington, Minn.-based Lynx Innovation Inc. Contact him at miked@ lynxinnovation.com.

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