As consumption patterns shift away from OECD countries to the developing world, businesses need to leverage on technology to overcome last-mile delivery obstacles
According to a 2008 International Monetary Fund (IMF) issues brief on globalisation, the value of trade as a percentage of world GDP increased from 42.1 percent in 1980 to 62.1 percent in 2007. Foreign direct investment, meanwhile, jumped nearly fivefold from 6.5 percent of world GDP in 1980 to 31.8 percent in 2006. The impact of globalisation on developing economies was described as such:
“Exports, often a source of economic growth for developing nations, stimulate job creation as industries sell beyond their borders. More generally, trade enhances national competitiveness by driving workers to focus on those vocations where they, and their country, have a competitive advantage.”
“In the last 30-35 year period, about a billion new workers joined the global workforce,” says Victor Fung, Group Chairman of Hong Kong-based retail and logistics conglomerate Fung Group. “It’s not just China alone – it’s China, India, Southeast Asia, and the former European communist bloc. What that really brought in was the globalisation of production. It allowed a lot of economies, before they’ve created a lot of verticals, to specialise in a niche and join the global economy.
“It also gave rise to the participation of millions of small and medium enterprises. If the world had gone the other way, and the global supply chains did not come to pass, and everything was vertically integrated, the world would be dominated by a smaller and smaller number of large companies.”
Eastern promise
Speaking at the recent public SMU public lecture, “The next wave of globalisation”, Fung, a founding member of the SMU Board of Trustees, explained how international business was a relatively simple business at the beginning of the globalised economy: produce in the East and sell to the West.
“At the start of the period, OECD countries accounted for 84 percent of global consumption.” Explains Fung. “Global supply chains notwithstanding, you were essentially sourcing in the East to sell to the West. Up to five years ago, it was all about efficiency. Every time you move a product, you shave a percentage off its cost.
“Now it’s changed. In the next 30 years, the consumption will migrate from the OECD countries to the developing economies.”
OECD data puts the number of “middle-class” people in Asia at 1.8 billion in 2009, accounting for 23 percent of global middle-class consumption. By 2030, those numbers are projected to spike to 3.2 billion and 59 percent. China and India will make up much of the growth, and Fung urges businessmen to rethink how to do business to tap into the growth in developing economies.
“Let me share with you what we do at Li&Fung regarding the OECD markets,” Fung explains. “We have about 400 customers, and they are basically the biggest retailers in the west. The structure of the retail industry in the west is well-developed, and the 400 retailers cover the entire market.
“The problem with the developing economies is that you have millions of SMEs that are small wholesalers who sell to small retailers. We have a distribution business in Southeast Asia called Inchcape that handles 100,000 accounts and that was already driving us crazy! With so many wholesalers, how are we going to collect our receivables? And how do you manage inventory?”
Last-mile obstacles and opportunities
The collection of receivables have been made easier, says Fung, by the development of online payment systems such as PayPal and Alipay: “It’s almost like payment before delivery!” Inventory management, however, remains a tough nut to crack.
“The last mile is difficult,” Fung concedes, referring to the portion of a product’s transit from the final delivery centre to the customer’s door. “The whole idea has to be, “How do you service this myriad of SMEs?’ It’s not really a problem of B-2-B but B-2-small-B. I don’t think much has been done in that area.
“My thinking is: Let the small B’s do the last mile. Big businesses cannot do it because the economics just don’t work. How do you achieve that? You have to think about forward deployment of merchandising, like a uberisation of operations in localised areas. It’s hyperlocalisation.”
He concludes, “The end result is endless opportunity! Despite what anyone tells you, nobody has the solution. This is when you can create new businesses and new business models. You don’t have to be a technological genius – use other people’s technology.”
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