International Logistics Inc. Export Potential
An analysis of new markets and potential organic growth opportunities is always a subject to various assumptions that are based on the business of the company. These assumptions drive help I assessment of internal organizational capabilities and external influences, such as governmental, environmental, legal and other aspects, directly impacting business activities. International Logistics Inc. is involved in extremely sensitive and demanding business segment, not only from the perspective of the supply chain and customer relationships, but also from regulatory background, technical capacity and characteristics of the local markets in which the company is present. It worth mentioning, however, that differentiated business model and own logistics and transport operations, consolidated in the company´s profile offer strong competitive advantage through bringing solid expertise and capabilities to build on market strategy. High tech equipment is an asset-heavy industry with very short product lifecycle and increasingly demanding customer profile, hungry for innovation and superior quality. That said, considerations of new market segments and competitive analysis should place a lot of emphases on transportation and logistics capabilities that will allow the organization fast response and product turnover, demanded by its clients. The objective of this study is to identify the country that has the capacity to absorb the offer of International Logistics Inc. on high tech products and can present relatively stable economic environment for profit margin consistency. It is critical that the company can overcome the challenges associated with regulatory background and import regulations of the country to be able to utilize on its core competence – unique and innovative technological solutions. These economic and logistics constraints, along with the analysis of the market potential, revealed greatest potential in exporting operations to Russia. The argument that this document aims to enact in the discussion is that, in spite of dubious reputation of the country in terms of its customs operations and import procedures, International Logistics Inc. possesses requires set of skills and internal capabilities that will enable smooth and well-structured operation in the country. Given great market potential and growth specifically in high tech product sector, Russia can become a “goldmine” for International Logistics Inc. product.
The research conducted to identify potential exporting countries was primarily based on the size and potential of the high tech industry in general as well as available infrastructural support and background for full and effective utilization of the company´s products. These elements are critical for taking decision on moving forward with the country choice and analysis, first of all, as the absence or lack of market potential make the investment uninteresting and its opportunity costs extremely high. Secondly, lack of infrastructure to support the technical solutions, offered by International Logistics Inc. will result in Brand delusion and negative customer feedback. As such the use of mobile 4G technology will become irrelevant, should the country not be able to provide appropriate urban infrastructure.
The first stage of the research allowed the research team to narrow down the scope to three potentially interesting locations; Brazil, Russia and Argentina. Further simulation and evaluation of the market was based on logistics attributes. The team analyzed such elements as transport and technical infrastructure, incoterms, corruption levels and letter of credit terms acceptable for local organizations and country´s readiness to work with new product from the regulatory perspective and social need. The analysis revealed that Argentina presents a number of challenges related to current political turbulence and tightening international economic relations that put pressure on the activities of foreign bodies in the country. Additionally, it was revealed that current levels of domestic spending reflect downward trends as the people tend to increase their propensity to save as the response to the political and economic uncertainty. Finally, transport infrastructure presents several challenges that may negatively affect the lead times for product delivery. That said, maritime transportation solution is relatively complex as the feeder services, linking ocean vessels to call major hubs are overloaded, and transit times in intermediate ports can contribute to further delays.
The analysis of Brazil and Russian market revealed equally interesting background; the decision to opt for Russian market was determined by the alignment with commercial strategy of the company that outlines the need to diversify its market presence through Europe and Asian regions. Given the proximity and similarities of Russian market with some major Asian areas of interest, the country is considered an interesting starting point for further expansion to China and Hong Kong. There are several advantages from logistics perspective, related to Brazil imports, majorly related to the existing direct ocean routes, providing relatively short lead times and cheaper transportation costs. The research outlines the potential of growth in European and Asian regions that will allow utilizing on economies of scale and bringing down total transportation costs in midterm future. Given the local infrastructure and consumer spending index, it is also possible to argue that Russia can offer better profit margin on the International Logistics Inc. products that will also leverage the costs disadvantage, comparing to Brazil.
With that in mind, it was decided to focus the research and evaluation of Russian high tech market. External environment scanning was done, using political, economic, social, environmental and legal (PESTEL) framework that allows identifying two to three core challenges and opportunities among the factors and enabled further strategy alignment with the market specifics.
Political factors, relevant for this study reflect stable economic environment and favorable conditions for high tech export. The government provides a number of stimulus packages to give a push to local business development, especially in electronics and Information Technology (IT) sectors. Governmental regulations in the industry are reasonably low, and there is a lot of room for independent decision-making in regards to the ways of handling distribution and merchandise channels. One of the greatest concerns for the potential investors in the country is extremely high Corruption Perception Index (CPI), placing Russia on the 127 position among least developed countries (TI, 2013). Custom operations in the country are concentrated in the public sector and, in many cases, prevent the country from developing more coherent and efficient brokerage and cargo handling operations.
Economic background demonstrates that the country is one of the fastest growing economies with Gross National Income (GNI) per capita of USD$ 12,700 and inflation on consumer price of 5.1%, which represents 50% improvement relative to crisis year 2009. The country focuses on the development of its technological infrastructure and average spending for R&D in high technology accounts for 1.25% of the total GDP. In terms of logistic operations, the country represents open competition with a high concentration of local customs brokers and NVOCC that operate on intra-European and Russian internal market. Market entry barriers are not high, but the influence of relationship factors and high corruption level create certain challenges in establishing smooth export and import procedures in major country´s ports. The inclusion of Russia in World Trade Organization (WTO) the country have initiative several programs for easing the high tech import barriers, which makes the country even more attractive for International Logistics Inc. (Software Russia, 2011).
Social factors outline favorable environment for the technology market, with a high proportion of a young population at average life expectancy of 75 and 63 years for women and men respectively. Technology use among the population of large cities, such as Moscow, St Petersburg, Yekaterinburg and Vladivostok have been increasing over the past years. The influence of the social factor on export operations from the US, however, can be significant as a way of doing business in the countries is very different. Russia is a collective culture with nurturing as an essential cultural element of any business model. The US, on the other hand, is a culture with strong power distance and long-term orientation (Hofstede, 2001). This clashes in social elements have to be carefully handled from organizational and operations perspective.
Technological factors indicate high country´s potential for market entry. Over the past eight years Russia demonstrates outpaced growth of mobile technology and internet usage in business and personal environment. Moreover, the country invested heavily in the development of Russia´s silicone valley that serve as a support for international market players, willing to establish their operations or export to the country. From an infrastructural standpoint, Russia is a global leader in development and scale of inland transportation solutions that include high level road and world´s best railroad connections. In spite of the size and distance challenges, the country managed to achieve non-interrupted operations to the majority of its locations. Inland transportation market is dominated by three largest competitors; Fesco, UCL Holding and Sovmortrans Group (RBC, 2011). The reality shows that average logistics operations costs in Russia are higher than average, accounting for a total of 20% of GDP, comparing to 10% in the US and 13-15% in Brazil.
Environmental factors include legislation on ‘green’ practices in regards to transportation and local operations. Environmental Performance Review, carried out by the OECD (2006) outlines a number of challenges in incorporating environmental reforms into the economic strategy of the country. Corporate Social Responsibility (CSR), based on the same research is still treated as a must for even large corporations, rather than strategic objectives of the businesses (OECD, 2006). Russia is undergoing significant changes in regards to its compliance with international environmental standards and regulations. The current state of events, however, indicates that American company, working directly with Russian suppliers and organizations in high tech retail sector may face an ethical dilemma in regards to the integrated Code of Conduct.
Legal factors determined by highly regulated export and import environment that at the same time suffers from a lack of coherency on control mechanisms. There are significant differences in cargo handling procedures in St Petersburg and Vladivostok ports, as an example. This requires international players to develop local capabilities and ensure that the company possesses required tools to handle bureaucratic procedures with needed efficiency. It is important to note that high tech industry is in advantage as due to strategic importance of the sector government is trying to loosen the barriers for high tech import to the country.
Supply Chain Assessment for the given strategy is based on the basic model that will include Production Planning and Inventory control on the upstream operational side and distribution and logistics processes on the middle and downstream of International Logistics Inc. The model, prepared for the export of International Logistics Inc. product to Russia is presented in Appendix I and outlined the basic mapping of supply chain processes that will be involved in project planning of Russia market entry. Based on International Logistics Inc. in-house expertise and competence, the company will be able to utilize existing structure of manufacturing and outbound distribution logistics and will utilize on the capabilities of own NVOCC to arrange maritime and ocean feeder transportation on FOB basis. Inbound logistics solutions will be outsourced to a third party logistics provider (3PL) in the inbound port location. The analysis of existing processes allows arguing that the company possesses necessary skills and technical capabilities to pursue Russia entry strategy. The weakest link is a local market knowledge that is well known for its specificity and burden of bureaucratic procedures. The company should enter the market with local service providers and ensure reasonable lead times through utilization of local expertise and capability. Business growth model will further allow extending supply chain operations to local logistics by opening own representation. Effort prioritization, therefore, is on strategically affiliated partnership with downstream suppliers and merchandisers (Lambert, 2008).
The project suggests utilizing maritime transportation scheme with Maersk Line Company that possesses strong expertise in high tech product logistics and can ensure compliance with security and safety regulations measures required for the transportation of the product. Given security regulations and customs clearance requirements, the only port that can effectively handle the shipments of high-tech in Western Russia is St Petersburg Petrolesport terminal (PLP). Outbound services in the United States will continue from the Newark as the major hub for high tech exports. Transportation Map is presented in Appendix II and outlines outbound inland logistics, ocean, feeder and inbound logistics transportation solutions. It is important to note that inbound transportation solutions may vary depending on the choice of final destination and 3PL provider. The preliminary assumptions made that the major concentration of retailers in Russia is in Moscow, St Petersburg and Samara city regions. With that in mind, the transportation map was prepared to outline inbound logistics solutions for these locations. The project suggests that the loading hub for all the product will be Newark port. The company will utilize Maersk line services from the US to Rotterdam in Netherlands and further feeder service of Seago Lines between Rotterdam and St Petersburg. Inland transportation to Moscow and St Petersburg will be arranged with 3PL trucking provider, while Samara region will be covered through rail transportation from PLP port. Import customs clearance will be done through local agent in PLP.
The analysis of the International environment and potential market opportunities based on import of high tech equipment revealed that Russia and Brazil present greatest opportunities for fast growth of export business to these countries. While the analysis of the external factors and overall market potential demonstrate that both countries have an interesting for International Logistics Inc. background, the study determined that Russia as the importing country has more strategic synergies with the overall commercial strategy of the company. First of all, the country has been experiencing accelerated growth of high tech activities and import. Its political and economic strategy demonstrates that there is significant interest in developing this sector of the economy. Strategic focus on high tech technologies is supported by Russian participation in WTO and the discussions around membership in Information Technology Agreement (ITA). The analysis revealed that internal capabilities and existing network provide International Logistics Inc. with sufficient capacity to absorb this strategic growth and develop robust export operations to the country. Supply chain assessment demonstrates that the company can fully utilize its existing production and outbound distribution operations and count with the support of related functions under documentation handling, freight forwarding and NVOCCs. Transportation solution, recommended for this market entry strategy, is based on existing network of the largest container carrier Maersk Line and well-reputable in intra-Europe region Feeder service. To gain specific market insight and knowledge in inbound administration and cargo handling process the company will initially utilize local 3PLs and custom brokers. It is expected that Russia entry will open a number of opportunities for further business expansion into Asia and Eastern Europe region.
TI (2013). Corruption Perception Index 2013. Transparency International. Retrieved 13 February 2014, http://www.transparency.org/cpi2013/results
World Bank (2013). Country Indicators – Russia. World Bank Official Website. Retrieved 14 February 2014, http://data.worldbank.org/indicator
Software Russia (2011). Russia’s WTO Accession to Ease High-Tech Import Barriers. Software Russia News. Retrieved 14 February, 2014, http://www.software-russia.com/news/industry_news/russia-wto-accession-to-ease-high-tech-import-barriers#sthash.1CmjeJrt.dpuf
Hofstede G. (2001). Culture's Consequences: Comparing Values, Behaviors, Institutions and Organizations across Nations. Thousand Oaks: Sage Publications. Print.
OECD (2006). Environmental Policy and Regulation in Russia. The Implementation Challenge. The Organization for Economic Cooperation and Development. Retrieved 14 February 2014, http://www.oecd.org/env/outreach/38118149.pdf
RBC (2011). Russian Transport and Logistics Services Market in 2010-2011 and Forecast for 2014. Consulting Department RBC. Print.
Beamon B. (1998). Supply Chain Design and Analysis Models and Methods. Seattle, WA: University of Washington. Print.
Lambert (2008). Supply Chain Management: Processes, Partnerships, Performance. 3rd Edition. Sarasota, FL: Supply Chain Institute. Print.
Appendix I – Supply Chain Mapping
*Source adapted from: Beamon B. (1998). Supply Chain Design and Analysis Models and Methods. Seattle, WA: University of Washington. Print
Appendix II – Transportation Map