While emerging markets are growing as the new source of global economic growth, outpacing growth rates of traditional developed markets, a number of factors – near sourcing, modal shift and cost pressures including high fuel prices – pose challenges for air freight going forward according to a recent report. By Donald Urquhart.

 

Now in its fourth edition, The Agility Emerging Markets Logistics Index 2013 compiled by Transport Intelligence (Ti) and funded by global logistics provider, Agility, assessed 45 major markets and identified the attributes that make them attractive for trade and logistics professionals.

The index highlights the fact that the emerging markets slowed along with the rest of the global economy in 2012 as a direct result of the impact of the European crisis, years of continuing stagnation in Japan, and fiscal uncertainty in the United States. The combination of these events weakened trade and financial flows, resulting in slower growth than was expected for many emerging economies, but that their economic performance was still generally stronger than that of developed markets.

The 45 countries in the Index grew at an average of 4.4 per cent according to the International Monetary Fund. On the other hand, the developed economies of the US and European Union saw a 2.2 per cent growth rate and a 0.2 per cent contraction, respectively. “Consequently,” the Index’s authors note, “the developing world continues to remain at the forefront for investors.”

But significantly, while the BRIC countries (Brazil, Russia, India and China) have played a key role in global growth for a number of years, other emerging markets – Saudi Arabia, Indonesia, United Arab Emirates (UAE), Malaysia, Mexico and Turkey – are now showing increased promise as potential investment alternatives. “Despite their size, growth and relatively sophisticated logistics networks, China, India, Brazil and Russia need to do more to address underlying weaknesses that could hurt performance and dim their attractiveness as an increasingly competitive group of second-tier markets becomes more alluring,” according to the Index.

Commenting on the rise up the Index by these six countries, Agility chairman and MD, Tarek Abdulaziz Sultan Al-Essa said that although they represent smaller market size, “one cannot underestimate or ignore those markets if we want to continue to develop and find new opportunities in this new economic norm in the world.”

“Emerging markets have shown resilience and growth, although a little slower growth than previous years.” There are a number of drivers behind this growth Al-Essa said, including: A younger, growing, connected population, domestic growth and increasing trade with their emerging market partners. This is a trend that is expected to continue to push the growth factors in 2013 and beyond, but with a continuing dependency on the more mature developed world which are tied to very sizeable markets.

De-linking of markets

Speaking on behalf of the Ti research team behind the report, John Manners- Bell, CEO of Ti said there has been a progressive ‘de-linking’ of the emerging from the developed economies. “Four years ago when the financial crisis really hit the developed world I think it was at that point the developing markets began to be weaned off dependency. Part of that we’ve seen as what you might call ‘Sinocentric’ trade lanes developing – Africa and Latin America are integrated with not just China but with the intra-Asian region.

“We’ve seen through the Index some of those trade lanes developing very fast, as the developing world really starts trading with each other as a result of increasing standards of living and disposable wealth.

Also ‘intra-supply chains’ are becoming more integrated across the developing world, mainly in Asia where components are now manufactured in one country exported to another country, re-exported to maybe China where they’re assembled and exported from there. There is a great deal more dependency within a region then there ever has been, as supply chains become more systematically integrated.”

Manners-Bell anticipates that for the foreseeable future there will be a dependency on the developed world, but with the growth of consumer markets within the same region as production,

“we’re seeing an extra layer of complexity within trading regimes,” he says. “Global manufacturers are having to address the fact that the consumer markets in the developing markets are growing very quickly so they’re also having to deal with the fact they have to provide goods to the developed markets in the US and Europe and have to do it in a cost effective and low cost way.”

These are the current trends, he notes: Sophisticated and complex markets with each manufacturer having its own strategy depending on where the enduser consumer markets are and where they can develop products for the least cost in terms of both labour and transport. “There’s no clear cut pitch here, but we do see that the developing world has developed a life force of its own and that these countries are no longer just a manufacturing location, or assembly location for goods going to the West – they have their own consumer markets as well, which has led to very complex and sophisticated trade networks being developed.”

Al-Essa confirmed this from Agility’s own experience where the logistic provider’s larger, well known mobile phone manufacturers produce in markets like China for European markets, as well as, the domestic market and also typically have manufacturing bases in India and Vietnam as well, to serve as platforms for serving both those markets and those they are close to.

The China factor

And while China still retains its overall number one ranking on the Index by a healthy margin over second ranked India, its index score has slipped slightly in the face of the numerous challenges thrown up by its own break-neck development and the turmoil of the global economic downturn. But none-the-less, China’s ongoing dynamism continues to outpace most of the world, giving it the top score on the Index for ‘market size and growth attractiveness’. The country also ranks highly for its ‘connectedness’ placing second. But the country’s “persistent and growing gap in income disparity” hurt its ‘market compatibility’ rating, slipping to 12th position this year from 8th last year.

Industry professionals polled for the Index were asked if they believed a trend for moving production away from China towards other emerging markets is developing. “More professionals now hold the view that China no longer has the competitive advantage as a lowcost production location. For those looking for the cheapest option, other emerging markets may present better opportunities,” the Index said. A strong majority of respondents – 62 per cent – said that they either ‘agree’ or ‘strongly agree’ that production is increasingly moving to other emerging markets.

From Agility’s experience this declining cost advantage has seen companies look at alternative opportunities in other countries like Vietnam, Cambodia, or deploying west to inland China.

Manners-Bell agrees, saying the cost advantage is eroding both in terms of labour and transport costs as a result of rising fuel prices over the last few years, “and for that reason when it comes down to a sourcing decision, or production location decision it’s a far more difficult choice now for global manufacturers.”

Near-sourcing

This then brings the issue of nearsourcing into the picture, with some of these sourcing and production decisions landing closer to home with these rising costs driving decisions about preferred production locations. ‘Near-sourcing’ – the effort to control costs by producing in countries adjacent or close to major destination markets – is again on the rise.

Markets close to the US and Europe, such as Mexico and Turkey (overall ranking 9th and 10 respectively on the Index), are attracting increased attention, the Index notes. In the case of Mexico, Manners-Bell says the country is enjoying strong growth as a growing number of US manufacturers – in particular automotive manufacturers and increasing interest from high tech and aerospace manufacturers – are choosing to locate closer to their home markets for a variety of reasons.

This includes he says, advantages in time-to-market, quality control as they’re more able to get down to ensure the quality of their products and also in terms of risk. “Extended supply chains result in increased risk therefore manufacturers are looking to have their suppliers closer to their markets,” he adds.

But as the Index notes, “manufacturers face an increasing dilemma when it comes to locating production. The savings and efficiencies gained by near-sourcing on the doorstep of large developed markets must be balanced with their ability to tap into the growing consumer class in the emerging markets of Asia, the Middle East, Latin America and Africa.” And weakened demand in Europe, the US and other developed economies means emerging markets have been less able to depend on these countries as export markets.

At the same, the Index notes that several of the larger, more advanced emerging economies are fueling demand and have become attractive consumer markets. That has powered increased trade between emerging markets and led to development of vibrant retail sectors, increasing opportunities for domesticbased logistics operations.

Top air trade lanes

For air freight the Index notes that the US overtook the EU as China’s largest export market in 2012. While China’s air exports to the US remained almost flat, exports to the EU fell an estimated 11.7 per cent. Demand from Europe weakened in 2012 as economic conditions deteriorated further. The top trade lanes from emerging markets to the US/EU were identified as (from first position down): China-US; China-EU; India-EU; Colombia-US; Kenya-EU; Chile US; India-US; Peru-US; Brazil-EU; Mexico-EU.

And while emerging markets tended to record stronger economic growth than the developed world, the global downturn also impacted air cargo destined for emerging markets with China’s air freight imports from the EU, for instance, expected to fall 13.3 per cent in 2012. China’s air imports from the US are expected to decline at a rate of 5.6 per cent. Of the top 10 trade lanes, the only air route to experience volume growth in 2012 was trade originating in the EU destined for Saudi Arabia. The top trade lanes from the US/EU to emerging markets were identified as (from first position down): EU-China; US-China; EU-UAE; EU-India; USBrazil; EU-South Africa; EU-Mexico; EU-Saudi Arabia; EU-Russia. Overall, declining import/export numbers were impacted by a number of factors including the deteriorating economic conditions in 2012, a possible shift toward trade between emerging market trading partners and a possible modal shift from air to the cheaper alternative of sea freight, the Index said. Respondents indicated their expectations for the US and EU economies showed about half thought that the eurozone growth was going to be flat this year with another 23 per cent expecting it to contract over the nearterm whereas for the US the response was much more upbeat with 60 per cent expecting modest growth. “The feedback is certainly that the transpacific is going to be much more buoyant than Asia- Europe trade. That is the story that I think will be ongoing for the next few years – growth in the US and flat, to nogrowth in eurozone,” Manners-Bell said.

Indeed this is what Agility is experiencing, with higher levels of trade and export out of the US whereas in Europe growth is challenged, especially in the more mature markets – other than Germany, but it’s still lower growth than the US, he says. And what is particularly interesting is that much of this growth is being fed by new, emerging companies, eager to tap far-flung emerging markets.

“We are seeing, not the usual suspects, but emerging companies out of the US pursuing growth opportunities in those emerging markets.

Modal shift

While there is no doubt there has been some pressure on air cargo from a modal shift to the cheaper sea freight mode, Al-Essa doesn’t believe it is a long term trend. “What we’re seeing is clearly lower shipments, so customers are shipping less – whether consumer electronics or fashion or the like.” There will always be a need for to ship by air freight and he believes it will shift up or down, but within a certain margin.

“Clearly fuel prices are a factor today. What we do see in ocean freight, given the near-sourcing opportunities and the shorter distances, is a trend for companies to leverage ocean shipping as an alternative to air shipment given the shorter trade lanes,” he said, citing the intra-Asia trade lane which relies more heavily on ocean shipping. But he hastens to add, that it’s a growing market versus an outright shift from air to ocean – “it’s more a new market opportunity, as opposed to ‘let’s shift from air to ocean’.”

For Manners-Bell, “the original trend was prompted by the economic downturn and I would normally expect it to be cyclical – when there is an upturn in economy then air freight would pick up at the expense of sea freight, but I’m not too sure it’s going to happen in this case.

We will have to see because with the shippers getting into the habit of using sea freight and developing their strategies around sea freight rather than relying on air freight to fulfill part of their needs, there is a risk they won’t migrate back to air cargo when the global economy picks up.”

But he added he was surprised when talking to some major retailers and shippers, saying they have sometimes been “incandescent with rage” over the strategies employed by shipping lines with the way schedules have been drastically altered or dropped altogether along with slow steaming.

“They really regard this as shipping lines having very little in the way of focus on customer service with very major shippers asking ‘how can they provide services to their own customers when they can’t rely on their service providers?’.

But he adds that despite their complaints they are still continuing to use sea freight as can be seen from the figures, which suggests that it may just be a case of moaning and complaining about it, but “at the end of the day their buying decision is still down to cost, and that is the way of the world at the moment.”

– The full Index is available for download at www.agilitylogistics.com