In their latest World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) listed over 5,300 current special economic zones (SEZ) in over 140 economies. Out of these, approximately 1,000 have been developed over the last five years. Another 500 new zones are on the drawing board but have yet to be built. Between 90 and 100 million people work globally in SEZs, which are mostly located in the immediate vicinity of seaports, airports or border corridors. In view of such rapid growth, it is obvious that the impact of the COVID-19 pandemic is particularly visible in the recession of business activities in SEZs.
As a recent study issued by the Institute for the World Economy (Institut für Weltwirtschaft, or IFW) in Kiel/Germany concludes, SEZs are currently experiencing substantial losses and disruptions in production. Particularly hard hit are SEZs in Asia, Latin America, Africa, and the Middle East. The IFW identified four main aspects jeopardizing the economic stability of SEZs during the crisis.
Firstly, the business performance of SEZs is affected by governmental measures, which aim to tackle the spread of COVID-19. For example, regulations, which are important to ensure social distancing, unfortunately also result in an immediate slowdown of production lines within the zones.
Secondly, production processes are heavily shaken by disruptions in supply chains, resulting in inconsistent flows of raw materials needed for other stages of manufacturing.
Thirdly, consumption expenditures and demand have declined significantly, and so has the appetite of financiers to directly invest in the foreign corporate sector.
Lastly, the economic crisis is anticipated to be amplified by financial feedback loops, which will cause further widespread liquidity problems.
However, sooner or later the market turmoil will start to ease again, and new opportunities will pave the way for a world after COVID-19. In fact, SEZs, which are suffering enormously from the global downturn today, will play a significant role in mastering the aftermath of the currently ongoing crisis tomorrow.
SEZs as a key driver of international trade
SEZs are vital to the development of international trade due to their capabilities to boost export volumes. Consequently, they represent an important element in the recovery of the economy after the Corona crisis. In this regard, the Organisation for Economic Co-operation and Development (OECD) estimates that some countries will channel over 70% of their exports through SEZs, which function mostly as separate customs territories.
Furthermore, governments have a great interest in supporting the construction and expansion of free zones to generate jobs, increase production capacities and to attract FDI. Potential investors benefit from business-friendly concessions in terms of favourable customs incentives and fiscal regulations, sophisticated infrastructures and hinterland connectivity, proximity to core markets, adequate labour skills and streamlined administrative processes.
Major challenges for SEZs to compete in global supply chains
Although the majority of SEZs function as free trade zones, they nevertheless differ in the scope of business activities. Whereas SEZs in more advanced emerging markets increasingly focus on specialised industries and innovation, they tend to concentrate more on logistics in developed countries. Irrespective of their focus, SEZs are facing a variety of challenges to position themselves in a highly competitive environment.
As the UNCTAD highlights, challenges limited to traditional aspects such as ensuring low labour costs are increasingly eroding, whereas new challenges extend to the sustainable development of imperative, technological revolutions, such as 3D printing, big data, and IoT solutions to name a few. A further example is the current changing patterns of international manufacturing.
In this context, it is of utmost importance for SEZs to elaborate on a suitable strategic focus, adequate investment promotion tools, and effective communication channels that reach out to potential financiers in order to build an attractive investment climate and to be successful on the international market.
Sophisticated marketing concepts foster the success of SEZs
According to a survey across national Investment Promotion Agencies, approximately one quarter of SEZs struggle with the absence of anchor tenants and have not managed to reach the critical mass of required investors. Approximately half the SEZs face insufficient links with, and low capacities of local suppliers. In this regard, a key factor for the success of SEZs is the identification of unique selling and value propositions, which are embedded into a suitable marketing concept that targets potential financiers.
At HPC we conduct, amongst others, market studies, volume traffic forecasts, financial analyses, and business plans for all kinds of ports and logistics hubs. We always pay great attention to adjacent SEZs as an essential facilitator for cargo turnover and regional welfare. In this respect, the HPC transport economists acknowledge the importance of having the right marketing tools in place to promote the attractiveness of investment projects, and to communicate their competitive advantage to investors, financial institutions, the community, and other stakeholders.
Having the right marketing concept in place is crucial to react to current market demands and should generally be accompanied by a status quo evaluation. This can be achieved by conducting an initial market sounding, e.g. through stakeholder interviews, and an extensive SWOT analysis that measures the qualitative condition of various parameters including infrastructures, logistics, administrative services, and other benefits of the respective SEZ.
Moreover, it is imperative to elaborate a competition landscape and to take the structure of local or regional industries and planned manufacturing plants into account. From the findings of the status quo evaluation it will then be possible to derive powerful marketing goals and strategies that allow the SEZ to perfectly integrate into global supply chains and to aim for the most promising tenant settlements.
Finally, a meaningful marketing strategy will incorporate all 4P elements of the marketing mix, namely product, place, price, and promotion, whereby particularly the latter should not be disregarded. In summation, the decision of appropriate channels of market communication that include public relations, roadshows, and direct marketing approaches, will be an essential one to make so that the highest degree of investor awareness can be achieved.
Please feel free to share your thoughts on this topic and let us find a way together to turn the crisis into an opportunity.
See more at: HPC Hamburg Port Consulting – Transport Economics
About the author
Matthias Schliwa is a Consultant in Transport Economics at HPC. He has a long history of experience in maritime supply chains and worked for different ocean carriers. During his career, he gained a broad knowledge of the shipping, forwarding, and port industry. He is a specialist in various business fields including product and yield management, marketing, as well as data analyses. At HPC, Matthias brings his skills to the fore providing macro-economic evaluations, cargo traffic forecasts, stakeholder maps, and financial assessments related to numerous investment projects. You may contact Matthias at .