Dealing with the Infrastructure Deficit in Emerging Markets

Inadequate infrastructure adds significant costs to doing business in many emerging markets. Roads, ports, railways, airports, telecoms and electricity supply help businesses and the economy run efficiently. Yet poor infrastructure can and is being overcome, and can also offer opportunities for business.

The road to nowhere

The quality of infrastructure is not always aligned with the size of the consumer market. Major emerging markets such as Brazil, Russia and India suffer from poor infrastructure.

Quality of Overall Infrastructure in Selected Major Emerging Markets: 2012/2013

Source: World Economic Forum Global Competitiveness Report 2013-2014

Note: How would you assess general infrastructure (e.g., transport, telephony, and energy) in your country? Scores: 1 = extremely underdeveloped; 7 = well developed and efficient by international standards. Mean refers to the average score of 148 developed and emerging and developing countries.

• Taking Russia as an example, and focusing on transport infrastructure, in the World Economic Forum’s Global Competitiveness Report 2013-2014, Russia was ranked 136 out of 148 countries in terms of the quality of its roads; placing it alongside Mozambique.
• Russia is the world’s 10th largest consumer market so you can see that its road infrastructure is woefully inadequate in respect of its scale. Of course roads are just one aspect of infrastructure but Russia also suffers from poor quality port (88th) and air infrastructure (102nd). For a country that spans 9 time zones, weak transport infrastructure is a real issue.

Quality of Transport Infrastructure in Russia: 2012/2013

Source: World Economic Forum Global Competitiveness Report 2013-2014

Note: The ranking is out of 148 countries for roads, air and ports and 121 for railroads. Scores: 1 = extremely underdeveloped; 7 = well developed and efficient by international standards.

Russia is by no means alone in its transport infrastructure challenges. Manufacturers, particularly of fmcg products which by their nature need to be easily available to end-consumers, often take control of their own distribution to overcome the challenges posed:

• Coca-Cola offers a good example through its micro-distribution model whereby it employs local entrepreneurs to distribute its products. In East Africa, including Ethiopia, Tanzania and Kenya, when roads are too deficient for delivery trucks, bicycles and pushcarts are used to get the product to market;
• Colgate in Cameroon uses three-wheeled motorcycles to distribute its products to small, rural retailers. According to the company, deliveries increased by 500% and customer sales increased by over 40% as a result.

Power to the people

Electricity infrastructure is another key challenge – stable power is needed for running factories and shops and in consumers’ homes if they are to purchase electrical products. In the same WEF report, Qatar, the United Arab Emirates and Saudi Arabia are the highest-ranking emerging and developing countries in terms of the quality of their electricity supply; all are placed above major developed economies including Australia and the USA.

India on the other hand fares badly, coming in at 111th out of 148 countries – placing it between Mali and Mozambique.  Urbanisation, an increasing middle class, and economic growth have all put a strain on electricity infrastructure in India. Many businesses have installed their own generators to combat the frequent power outages, but this comes at a cost which in turn affects the bottom line.

From the consumer standpoint, electricity outages also bring problems, added to which, according to the World Bank, 24.7% of the Indian population were without electricity in 2011: this equates to 299 million people – more than the entire population of three Germanys. This clearly has an impact on sales of all sorts of consumer goods. However it also provides opportunities for companies able to innovate to overcome this.

• Godrej and Boyce launched what has been feted as the world’s cheapest refrigerator. It retails for US$69 and runs on a 12-volt DC current or an external battery. It was designed to target poor, rural consumers and in a country with 854 million rural inhabitants, this market is huge. The ChotuKool refrigerator looks from the outside like a box, consumes half the electricity of a standard refrigerator, and importantly, it also stays cool for hours with no power, due to its superior insulation;
• Nokia has also succeeded in India by innovating. One of its approaches has been to incorporate torches in mobile telephones to assist users during blackouts.

Innovate to overcome the last mile challenge

Working towards solving the infrastructure challenge in order to get goods to market is a crucial concern, but the same challenges also provide opportunities in designing market-specific products, like the ChotuKool refrigerator, to help consumers live with the infrastructure deficit.