Raising a New Russia: Understanding the Future of The World's Emerging Markets

In emerging markets around the world, the winds of change continue to blow. For countries including Russia, China, Brazil, and India, worker tolerance for sub-par working conditions is fading. Growing hordes of migrant workers continue to flood cities, redistributing bargaining power and increasing labor complexity. As these issues compound, organizations operating in emerging markets must answer new questions. What will these changes mean for governments? How will these changes impact capital investment, financial risk, and market capitalization? What do sustainable labor models look like? How will wage and benefit changes in emerging markets impact manufacturing costs, sales, operating margins, and national GDP? And, finally, what can organizations do to ensure that they remain competitive in environments where cheap labour is becoming scarce?

To answer these questions, businesses must first understand the realities that many emerging markets will face in the next 5 to 10 years. Over the next decade, income levels, especially those of blue-collar, lower class workers, will rise. In China, pay for that country's 150 million migrant workers increased 19% in 2008 and 16% in 2009. This increased occurred despite reductions in exports due to the global financial crisis. In the short term, governments will continue to engage in delicate tussle with union organizers, and wage growth in manufacturing jobs will rise between 7 and 10% annually. This shift will reduce the supply of manufacturing labor, while encouraging the migration of millions of poor, unskilled, rural workers. As local, provincial, and national governments deal with the increase in migrants, governments may impose legislation to preserve stability, including the addition of switching costs to deter worker mobility. Furthermore, to preserve opportunities for middle managers and develop barriers to foreign actors, governments in many emerging economies may limit the number of foreign nationals hired for critical jobs.

In addition to these changes, national wage increases, as well as demographic shifts, should be expected. Over the last 6 months, strikes in numerous Chinese factories including the Honda parts manufacturing plant, and suicides at Foxconn, resulted in a 10 - 30% blanket wage increases for impacted workers. Going forward, these increases will likely be permanently codified using fixed wage legislation that (when approved) will re-distribute wealth and increase operating costs for businesses in every sector. Similarly, city governments, burdened by migrant workers, will collectively demand that foreign operators provide financial support for social benefit programs. These demands will be supported by national labor movements, increasing costs for manufacturers, and further squeezing operating margins. Furthermore, demographic changes in emerging countries such as Russia (where approximately 16% of the population is 65 or older) will increase labor shortages, impacting manufacturing capacity and productivity.

To combat these issues, businesses entering or operating in emerging markets must exercise a greater degree of diligence, market planning, and preparation. Fluctuations in GDP, wage rates, inflation, and labor supply will significantly impact businesses operations. These variables must be closely monitored. Additionally, businesses in emerging markets need to be cognizant of the impact unions will have on the labor environment. Workers, unwilling to accept excessive hours and tough working conditions will show a greater affinity for union membership. To remain competitive, organizations must respond proactively, addressing worker concerns while preparing themselves for vigilant labor action. By responding proactively, organizations will minimize financial risk, maximize returns from capital investment, while positioning themselves to maximize their growth in emerging markets. Moreover, businesses that learn quickly from the Foxconn suicides and Honda strikes will have the opportunity to work collaboratively with unskilled workers. These collaborations will enable proactive organizations to develop competitive labour models, business practices, and organizational structures that are catalysts for long term, sustainable growth.