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Global Manufacturing Outlook: Growth while managing volatility
 

Global Manufacturing Outlook: Growth while managing volatility

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Global Manufacturing Outlook: Growth while Managing Volatility is a KPMG International report that investigates how large industrial manufacturers are dealing with market and input volatility in a ...

Global Manufacturing Outlook: Growth while Managing Volatility is a KPMG International report that investigates how large industrial manufacturers are dealing with market and input volatility in a global marketplace. The report was written by the Economist Intelligence Unit, which also executed the online survey and conducted the interviews on behalf of KPMG International. We would like to thank all of the executives who participated in the survey and interviews for their valuable time and insight. The survey was conducted in June and the interviews in July of 2011, and both reflect the economic and financial conditions at that time.

A total of 220 senior manufacturing executives participated in the survey. All respondents are responsible for, or significantly involved in, finance, supply chain, procurement or strategic development. Respondents represent the aerospace and defense, metals, engineering and industrial products sectors, including industrial conglomerates. All participants represent companies with more than US$1 billion in annual revenue; 40 percent hail from organizations with more than US$10 billion in revenue. Nearly half (47 percent) of respondents are C-suite executives or board members. They are geographically split among Western Europe (31 percent), North America (30 percent) and Asia-Pacific (25 percent), with the remainder coming from the rest of the world.

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    Global Manufacturing Outlook: Growth while managing volatility Global Manufacturing Outlook: Growth while managing volatility Document Transcript

    • GlobalManufacturingOutlook:Growth whileManaging VolatilityGlobal research commissionedby KPMG International from theEconomist Intelligence Unit
    • Interviewees PrefaceBob Kickham Global Manufacturing Outlook: Growth while ManagingSenior Vice President, Procurement, Volatility is a KPMG International report that investigates how largeLuvata industrial manufacturers are dealing with market and input volatility in a global marketplace. The report was written by the EconomistBarbara KuxHead of Supply Chain Management, Intelligence Unit, which also executed the online survey andSiemens conducted the interviews on behalf of KPMG International.Ding Liguo We would like to thank all of the executives who participated in theChairman, Delong Holdings survey and interviews for their valuable time and insight. The surveyAlex Molinaroli was conducted in June and the interviews in July of 2011, and bothVice President and President, reflect the economic and financial conditions at that time.Power Solutions, Johnson ControlsDr. Steve NewFellow: Management Studies, OxfordUniversity’s Säid Business SchoolMartin RichenhagenChairman, President and ChiefExecutive Officer, AGCOHenry YuChief Executive Officer, GeneralSteel Holdings© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • About the surveyA total of 220 senior manufacturing executives participated in thesurvey. All respondents are responsible for, or significantly involvedin, finance, supply chain, procurement or strategic development.Respondents represent the aerospace and defense, metals,engineering and industrial products sectors, including industrialconglomerates. All participants represent companies with more thanUS$1 billion in annual revenue; 40 percent hail from organizationswith more than US$10 billion in revenue. Nearly half (47 percent)of respondents are C-suite executives or board members. They aregeographically split among Western Europe (31 percent), North America(30 percent) and Asia-Pacific (25 percent), with the remainder comingfrom the rest of the world.1. What are your organization’s global annual revenues in 2. Which of the following best describes your title? US dollars? 0.9% Board member 0.5% CEO/President/Managing director 3.6% 1.4% $1bn to $5bn CFO/Treasurer/Controller 12.7% 21.36% COO $6bn to $10bn 13.2% CIO/Technology director $11bn to $25bn 15.9% 6.4% Other C-level executive 48.18% More than $25bn SVP/VP/Director 18.18% 5.9% 21.8% Head of business unit 17.7% Head of department 12.27% Manager Other3. In which region are you personally based? 4. What is your primary industry? 3.64% 0.45% Engineering and industrial 21.36% products (including 10.00% Western Europe 30.91% industrial electronics) North America Aerospace and defense 31.36% Asia-Pacific Conglomerate 24.55% Middle East and Africa (eg, multi-industry 22.27% organization) Latin America 30.00% 25.45% Metals Eastern Europe© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Foreword At the end of 2010 it looked like the long-awaited economic recovery was finally underway, but a series of global shocks throughout 2011 have taken the steam out of the positive momentum, casting doubt on a wider market recovery. Despite these challenges, Diversified industrial (DI) companies – accustomed to cyclical swings and continuous volatility – are clearly preparing themselves for the long haul. In this year’s Global Manufacturing Outlook survey, growth has emerged as a predominant theme along with a continuing focus on cost, risk management and global supply chain resilience. Today, companies are choosing to pursue growth through both product innovation and strategic alliances. They are also fine- tuning product costs with more sophisticated design and process improvements, positioning production capabilities closer to growth markets, and enhancing transparency to manage global risk. To provide context to this year’s survey results, the report contains a broad range of insights from KPMG partners, industry experts and innovative DI companies. These experts also weigh in on what it will take for companies to respond to the challenges and opportunities of today’s volatile global economy and distance themselves from the competition. Despite the prolonged uncertainties DI businesses face, many companies emerged from the 2008–2010 downturn with significantly reduced cost structures, more cash and liquidity, and a laser focus on their customers and markets. In an age and industry where volatility has become a given, companies that possess these attributes and pursue these strategies will likely define the standard of success in the next five years. Our report results show that DI companies are clearly positioned for growth, but they are doing so with a healthy respect for unpredictability and volatility. Jeff Dobbs KPMG Global Head of Diversified Industrials© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Content Executive summary 4 The business outlook: 6 growth ahead, but risks loom Growth strategies: 14 managing volatility Reworking supply chains 24 to support growth Conclusion 33© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Executive summary Despite a generally profitable year, many leaders of global manufacturing firms face a number of challenges. Just as the global economy looked like it was gaining momentum, the Japanese tsunami struck, unravelling many global supply chains. Since then, volatility has become a key watchword, as a wide array of macroeconomic risks – most notably the European and US debt crises – raise uncertainty over future demand and the spectre of a “double dip” recession. Yet executives at major manufacturers – organizations polled in an Economist Intelligence Unit survey representing firms with at least US$1 billion in revenue – are cautiously optimistic that they can realign their businesses toward top-line growth while managing the multitude of cost challenges.4 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Some of the key findings emerging from our research include: • Price volatility is the biggest headache for manufacturers. The number-one challenge identified for the year ahead is that of price volatility of raw materials and other inputs. Bob Kickham, senior vice president, procurement, at Luvata – a global metals and manufacturing group – recounts how a few years back a US$10 shift in copper prices in one day was an extraordinary occurrence. He is now immune to daily swings of up to US$250. Selected by 44 percent of firms globally, ahead of any other issue, price volatility is especially acute for Asian firms, selected by 54 percent of respondents. • Although the push toward emerging markets continues, this does not imply the demise of manufacturing in the West. One of the more striking research findings is that the US registers second only to China as a destination for new sourcing in the next 12 to 24 months. It ranks third highest even for emerging market manufacturers. “We’re going in both directions, says Martin Richenhagen, CEO of AGCO, a global farm ” equipment manufacturer, of his organization’s investment plans in both Asia and North America. Of course, it is clear that emerging markets are a major driver of growth: 52 percent of manufacturers say their growth plans hinge on these markets. But many plan to invest in mature markets too: 43 percent of respondents aim to expand capacity in developed markets, more than twice the proportion that plan cutbacks. • In the pursuit of growth, manufacturers are prioritizing new products. One noticeable shift when comparing respondents’ views from the last two years versus the next two years is the added attention that firms will devote to new products. Over the next two years those planning to rely on existing products in existing markets will more than halve (from 44 percent to 19 percent), whereas those planning to sell new wares in existing and new markets will increase from 37 percent to 56 percent. This will put a premium on innovation, and the survey shows that organizations are placing more emphasis on research and development (R&D). Indeed, innovation/R&D will be the second-highest priority for investment/expansion, after cost management. Many are opening design centers in high-growth markets. In doing so, however, they will be challenged by a shortage of skills, the top human resources concern cited by executives in those markets. • Diversification into new markets and new products will converge with a push toward input and process standardization. In response to both input price inflation and volatility, many organizations are prioritizing increased standardization. More than half of manufacturers polled (55 percent) plan to standardize production processes across sites, while nearly half (45 percent) will move toward standardized inputs across product lines. Given the concomitant shift toward a greater focus on new products, however, standardization poses a risk of homogenous product lines that could fail to engage consumers. Another challenge will be managing the tensions that could arise between Sales and Procurement, as one function tries to push new products into the market while the other works to standardize inputs. • Investment in supply chain risk management will continue, with a particular focus on transparency. Many organizations have already made substantial investments in bolstering their risk management functions over the past couple of years. Stung by the severity of the tsunami in Japan, this push will continue, with a particular focus on improved supply chain visibility, to better assess where potential vulnerabilities lie. The use of technology to improve supply chain visibility is the number-one tool that executives plan to rely on to identify risks (selected by 49 percent of respondents). KPMG Global Manufacturing Outlook: Growth while Managing Volatility 5© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The businessoutlook:growth ahead, butrisks loom Many global manufacturers can look But compared with findings back on a good year. Job growth picked highlighted in the 2010 Global up against one year ago, while both Manufacturing Outlook1, a degree of industrial output and global trade caution has crept in, primarily triggered were robust. The Institute of Supply by the European and US debt crises Management’s Purchasing Managers that have dominated the headlines Index (PMI), a monthly snapshot in mid-2011. Overall, confidence is of sentiment among procurement slightly down on a year ago. This executives, showed that as of matches a similar drop in the PMI (see mid-2011, confidence among chart). European manufacturers are manufacturers in the US had risen the most ambivalent about prospects, consistently for nearly two years. while Asian firms are most bullish. US manufacturers were also optimistic, This confidence was mirrored by perhaps because at the time of the manufacturing executives surveyed by survey, the full impact of the country’s the Economist Intelligence Unit in June debt crisis was not known. Given 2011. One in four survey respondents the potential of downside risks, such describe themselves as “very differences are unsurprising. The rate optimistic” about their organization’s of gain in overall economic output prospects for the coming one to two has declined in the US and Europe, as years, while a further 53 percent the global economy lost some of its are “optimistic. Luvata, a global ” momentum. This is filtering through metals and manufacturing group with to manufacturers. Joe Kaeser, the revenues of over €3 billion, is one chief financial officer of Siemens, a example. “2009 was a very poor year, conglomerate with revenues of €76 the eye of the recession. But during billion in 2010, recently advised that 2010–11, we’ve doubled our profits and increased efforts would be required we expect to be back at 2008 levels by to maintain growth going forward, the end of 2011, says Bob Kickham, ” as “the tailwind from the economic the firm’s senior vice president for recovery is likely over. 2 ” procurement. “Next year, we see that trend continuing, with double-digit Financial crises in the euro zone have increases, while we’re cautiously dimmed Europe’s economic outlook. optimistic in terms of growth in Japan is still recovering from the effects profitability. ” of its devastating March tsunami. 1 Global Manufacturing Outlook: Relationships, Risk and Reach, KPMG International, September 2010 2 Siemens sees end to ‘tailwind of economic recovery’, Financial Times, June 28, 20116 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • How optimistic are you about your business outlook in the next 12 to 24 months? 53% 51% 27% 25% 21% 15% 6% 2% 1% Very Optimistic Neither Pessimistic Very optimistic optimistic nor pessimistic pessimistic 2010 Survey 2011 SurveySource: Economist Intelligence Unit survey, 2011 and 2010. Purchasing Managers Index: Manufacturing January 2008–July 2011, a reading above 50 indicates a general expansion; below 50 a general contraction70605040302010 0 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Institute for Supply Management (ISM) KPMG Global Manufacturing Outlook: Growth while Managing Volatility 7© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • The Baltic Dry Index (BDI), an index past months, and is likely to remain of shipping costs, remains close uncertain in coming months, says ” to record-low levels. Developed Ding Liguo, chairman of Delong economies are just starting to Holdings, a China-headquartered grapple with their debt burdens, with steel manufacturing group with government austerity ahead. 2010 revenues of RMB9.9 billion (US$1.5 billion). He adds that steel In emerging markets, the outlook is production in China has been affected more positive, but risks lurk there as the country implemented credit- too. Inflation remains high while tightening measures to rein in inflation concerns mount about the overheating and cool its housing market. of China’s economy. “The global steel industry has been volatile inKPMG Insight Integrated Finance Governance to see their primary function as saying “no” to spending requests. Instead, Financial management is becoming the most agile organizations are seizing more central in managing risk both for on finance as a way to bring additional companies operating in Asia and for value in terms of analytics and insight. Asian companies looking to expand As the amount of data and noise globally. In both cases managers are proliferates, finance offers a way toDavid Frey becoming responsible for transactions gain insights and align the underlyingKPMG Partner, and processes that are occurring business case. I’m seeing clients moveAdvisory, thousands of miles away across toward center of excellence modelsKPMG in China multiple locations. To get a handle on where finance professionals, skilled that, I have been advising my clients in analytics, valuations, mergers, or to move their target operating model treasury are housed together centrally toward a structure with more integrated where they can serve as a repository finance governance. For too long of knowledge for outlying offices. That finance has been stuck at headquarters has been a very effective way to gain where managers have been allowed strategic leverage.8 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Price pressuresBut the most pressing challenge for and transport and distribution. Somemanufacturers is the cost of key inputs. could be steep. One in five respondents In the 25 years prior to 2005, theAlthough prices have eased more expect transport costs to increase by at average price volatility (for copper)recently, many commodities remain least 20 percent in the next one to twoat historically high levels. Meanwhile, years, while 16 percent think the same was minor. It would be a news storya jittery global economy has increased of primary raw materials. However, the if it moved US$10 in a day. But I amthe price volatility of key inputs, such greatest fear of price increases relates now immune to seeing swings ofas metals. This is easily the biggest to energy costs with nearly one in fourheadache for manufacturers, selected by executives expecting them to rise at US$250 a day.44 percent of respondents globally. One least 20 percent. Such sentiment mayexample is the price of copper, which be due to the fact that manufacturers Bob Kickhamincreased from US$3,500 per ton in 2005 are in the center of a price storm in Senior Vice-President,to over US$9,000 by mid-2011. 2011: industrial raw materials prices Procurement, Luvata are expected to rise nearly 30 percent,Unfortunately, executives do not according to the Economist Intelligenceanticipate much relief. A majority of Unit, on the back of a 44.5 percentsurvey respondents expects price increase last year (see Growth and priceincreases on raw materials, energy, forecasts). Some relief is forecast for 2012. What do you see as the biggest challenges for your business in the next 12 to 24 months? Percent respondents Price volatility on key cost inputs 44% Intense competition and pressure on prices 40% Uncertain demand 35% Risk and reliability in the supply chain 27%Efficiency in R&D/product development process 24% Increased regulation in our industry 23% Managing geopolitical risk 21% Improve technological efficiency 15% Prospect of tax increases 15% Lack of access to capital or credit 10%Source: Economist Intelligence Unit survey, 2011. KPMG Global Manufacturing Outlook: Growth while Managing Volatility 9© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Growth and price forecasts2010–2015 2010e 2011f 2012f 2013f 2014f 2015f Real GDP growth (PPP exchange rates) World 4.9 4.1 4.2 4.3 4.3 4.3 OECD 2.9 2.2 2.3 2.3 2.4 2.5 Non-OECD 7.4 6.5 6.5 6.4 6.5 6.5 Real GDP growth (market exchange rates) World 3.8 2.9 3.2 3.2 3.1 3.2 North America 2.9 2.4 2.5 2.5 2.5 2.6 Western Europe 2.0 2.1 1.6 1.9 1.7 1.7 Asia & Australasia (including Japan) 6.5 3.8 5.1 4.5 4.4 4.5 Oil prices: Brent; US$/b 79.63 108.5 94.50 90.00 85.00 83.00 Industrial raw materials 44.5 29.1 -7.0 -4.8 -5.9 -3.0 Metals 39.0 21.9 2.8 -5.7 -4.8 -2.0 Fibres 42.2 49.8 -30.0 -4.3 -7.8 -5.4 Rubber 81.0 38.1 -17.4 -0.9 -8.7 -5.0Source: EIU forecasts; e = estimate; f = forecastEmerging market manufacturers expect These cost concerns are exacerbatedfuture price pressures to be even more by intense competition and pressure tointense than their developed market rivals. keep prices down, the second-biggest challenge, cited by 40 percent of survey“The greatest challenge we have respondents. For many, price increases willseen recently has been the overall be unavoidable: 63 percent of executives agree that they will be forced to pass onincrease in price of raw materials, higher costs to their clients in the yearsuch as iron ore and coke, which ahead. Rounding off the trio of challengeshas affected our gross margin,” is uncertain demand (35 percent).says Henry Yu, CEO of General SteelHoldings, Inc. (GSI), a privately heldChinese steelmaker that plans toincrease output to 6 million tons thisyear, from 4 million tons in 2010.10 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG InsightMarty PhillipsKPMG Global Head of Aerospace & DefenseThe aerospace and defense (A&D) direct investment or joint venture cansector is used to weathering economic be immensely difficult. A&D companiesups and downs. Its exposure to know how to deliver when the marketthe fluctuations in government is really, really good and really, reallyappropriations has made the industry a bad. But the ‘in between’ makes itleader in instituting and managing cost hard to know what path to take. Wecontrols. That discipline will benefit it as help organizations work through thatit looks to transfer those cost savings decision tree. ”into new growth opportunities. “To gain clarity, organizations are Marty Phillips“There is no question that the next coming to KPMG for help in shoringfew years will see a marked upturn up their fundamentals, restructuringin mergers and acquisitions.” says their businesses, and spinning offPhillips. unprofitable assets.” One client had two business units with”With government coffers dry, A&D overlapping IT functions, for instance.companies are looking to invest in By combining those units, they cutadjacent markets and products. The” excess capacity and cost while alsochallenge, of course, is choosing which slimming down their managementcommercial sector to enter. “A&D model.organizations have a long memory, ”observes Phillips. “Many got burned Phillips believes it may take until 2014in the 1980s when they turned to a before the A&D market sees a reprievestream of private sector initiatives, in current market conditions. But, hefrom transportation to gaming. With notes, “A&D companies have a fairlyrisk aversion high right now, many high pain tolerance and they alwayscompanies are reluctant to sink money make a point of seeing to it that theinto unproven technologies. He adds, ” interests of shareholders are protected“navigating the right commercial and whichever way the market turns. ”geographic markets to enter through KPMG Global Manufacturing Outlook: Growth while Managing Volatility 11© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Striving for growth Despite all these challenges, many But if growth is back at the top of the manufacturers are clearly shifting from agenda, where will firms look for it and a dual focus on cost containment and what strategies will they implement to top-line growth to a more singular realize it? And how are supply chains emphasis on growth. This is not to say being restructured to support this that cost containment will be forgotten. growth? The rest of this report will Nevertheless, it signals a shift in address these questions. aspiration, after years of fire-fighting. Which of the following aspects of your business will you prioritize most? Top-line growth 19% 25% Cost containment 18% 13% Product quality 16% 13% 11% Customer relationships 11% 11% Operational efficiencies 10%R&D/innovation (including efficiencies in product 11% development life cycle processes) 9% 7% Back-office process efficiencies/shared services 9% 4% Innovation/speed to market 6% past 1–2 years Improved visibility on product costs 3% next 1–2 years 5% Source: Economist Intelligence Unit survey, 2011.12 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG InsightEric DamotteKPMG Global Head of Metals“A weaker US dollar and steady To compensate, Damotte says leading players are focusing on sustaining costdemand from China have made steel improvements.and metals one of the bright spots in “There is a tremendous amount ofthe global economy in 2011.” invested capital in the steel business.But steel is a cyclical business, and To justify the heavy fixed cost, theEric Damotte, head of KPMG’s global traditional thinking was that plantsmetals practice, warns that the needed to produce non-stop. The ideasector’s performance may be affected of shutting a blast furnace used to Eric Damotteby the undercurrent of uncertainty be considered impossible, but not sofueled by the European debt crisis anymore. As technology has advanced,and the tepid US economic recovery. producers can adjust capacity to cutThat cyclicality is sharpening as steep unnecessary costs. The industry has ”swings in the spot pricing of iron ore gotten a lot better at flexing productionsqueeze profitability. capacity in line with demand and reducing what used to be a fixed cost.The growth picture is also more clouded.“China has been the major driver of Intent on reducing finance andgrowth representing between 40 to 50 inventory risk, buyers of metalspercent of global production and demand, ” products are also keeping stock levelssays Damotte, “but that growth rate is low. “But this makes demand swingsprobably not sustainable and foreign more brutal, says Damotte. “That’s ”entrants are precluded from getting because when the market anticipatesa piece, given Chinese government possible price increases, buyers rushcontrols. Although some companies have ” in to lock up supply, prompting pricessought workarounds in the form of joint to rocket up for a short while beforeventures with Chinese partners, many dropping sharply again when the rushof these come with provisions, such as subsides. As a result, better business ”restricted ownership and complex rules intelligence is a top agenda item.that put into question the overall value. “Scenario building has becomeWhere then to look for growth? WithEuropean markets mired in the debt a real cornerstone of planning,crisis and the US recovery hampered something that has taken off overby slow growth, the metals industry the last 12 to 18 months,” sayshas focused its sights on countries likeBrazil, India and Russia that are rich Damotte. “My clients realize theyin mineral resources and have rapidly need to plot a range of variablesexpanding physical infrastructures. – both quantitative and qualitativeBut those markets bring their ownchallenges. Damotte adds, “in some – and plan contingenciesrespects, Brazil has been overly accordingly.”successful. The country has deep Reflecting on the sector’s near-termreserves of iron ore and coking coal, prospects, Damotte becomesmaking it one of the best places philosophical. “The economy worksin the world to produce steel. But like a self-fulfilling prophecy. Whenthe accelerating economy and the negativity abounds, results reflectrevaluation of its national currency have that. The good thing about steel,made the country an expensive place however, is that, cyclicality issuesto operate. India is another popular ” aside, there will always be a certainbeachhead, but operators must contend minimum of demand. Economieswith a developing infrastructure, are built on infrastructures, andcomplex environment, and a slow infrastructures are built with steel. ”decision-making process. KPMG Global Manufacturing Outlook: Growth while Managing Volatility 13© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Growth strategies:managing volatilityManufacturers are reshaping their Operating closer to new sources of Emerging markets are now morebusiness models in order to deal with growth important as sources of demand thanthis more volatile world. More than half As in many other industries, the macro for low-cost production (54 percent).(56 percent) of survey respondents agree trend of a steady shift eastwards Siemens, for example, is actively exploringthat their firms are changing models in continues in manufacturing. opportunities in lesser-developedorder to cope with market dynamics. countries such as Indonesia and Thailand.Just 15 percent say they are not. For an However, the US surprisingly “The core of our strategy is to shift ourindustry that is often perceived as being topped this year’s list for expected focus and look more toward [these]relatively slow-moving, this is a striking markets, says Barbara Kux, Siemens’ ”figure. There are numerous shifts that demand in the next 12 to 24 months, head of supply chain management, “inindividual firms will make, but three just barely edging out China for the order to ensure our planned businessthemes stand out: number one position. growth. Meanwhile, emerging market ” manufacturers see little reason to leave• Manufacturing/sourcing closer to India and Brazil both feature in the top their core markets. “Demand within China growth markets; five as well, and Germany ranked fifth. is significant enough that we have not had• A greater focus on innovation and Manufacturers increasingly see emerging the opportunity to explore such avenues, ” product diversification; and markets as crucial demand engines. says GSI’s Mr. Yu. Delong’s Mr. Liguo• More rigorous approaches to both risk More than half (52 percent) of survey says that more than 90 percent of the and demand management. respondents agree that their growth company’s sales go to Chinese customers. strategy is reliant on these markets. Which countries do you expect to account for the majority of your new business growth in the next 12 to 24 months? Top 10 only 41% 40% 30% 20% 13% 12% 9% 8% 8% 6% US China India Brazil Germany UK Japan Australia Canada Russia Source: Economist Intelligence Unit survey, 2011 3 Standard Chartered Research - The Super-Cycle Report - November 15, 201014 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG InsightAndy WilliamsKPMG ASPAC Leader for Diversified Industrials, KPMG in SingaporeAs the world’s second largest economy, partnering with Asian suppliers. Accordingsome see China as having outgrown to Williams, “one mistake foreignits “developing nation” label, but Andy entities make when expanding into AsiaWilliams, ASPAC Leader for Diversified is to assume that the outsourcing orIndustrials, KPMG in Singapore, says partnership model they follow in Europethe reality is more nuanced. “There is no or the Americas will work equally welldoubt that China has grown significantly here. Asia-Pacific hosts a tremendouson a commercial level. But, there are mix of people, cultures and sub-culturesenormous differences from region to all under one regional moniker. For thatregion within China. Some areas boast reason, DI companies cannot apply the Andy Williamsthriving business centers, while others are same solutions unilaterally whether it bestill decades behind in their development.” globally or even within the region itself. ”However, there’s no doubting the growthtrajectory. By 2020 or 2030, the majority Although Williams is bullish on the DIof the world’s middle class is expected to sector in Asia, he cautions that thebe in China. region’s rapid rate of growth probably cannot continue at its present pace givenWhile that strategy may give domestic global economic uncertainties. Whilebrands something to chew on, Western the region was largely buffered fromcompanies have a lot to learn from the the 2008 financial crisis, Williams seesChinese way of doing things as well. them as more exposed this time around.Chinese companies tend to go global “Domestic consumption sustained theon a sector basis. They consolidate region during the last downturn, butdomestically first, then look to buy inflationary pressures in China, Vietnam,outside. Says Williams, “by the time a DI Indonesia and others have cooledsector, such as engineering, has gone demand, and, as we know, global marketsfrom being a thousand strong to just the just aren’t buying right now.”five top players, the scale, the cash onhand and the acquisition experience are All this has put risk management moreusually massive. That gives them the ” firmly on the table. One way to managemeans to move forward globally, buying that will be through mergers andup big name companies and solidifying acquisitions. Says Williams,their leadership on the international stage.“The Chinese are masters at planning, ” “The smart money is at theadds Williams. commodities end of DI. Because if you think of the value chain it“The government issues a really is a case of ‘he who has themeticulously detailed five-year plan raw materials wins’.”that gives a roadmap to the economicand social priorities for China. “As a result, I expect my clients and other Asian conglomerates will pursue aCitizens, both corporate and private, more aggressive acquisition strategy totend to follow it rigorously. For lock in access. ”companies, that level of discipline Looking out over the next 18 months,and planning helps them execute Williams remains optimistic, but cautionswith far greater consistency.” that folks can be overly positive. “The opportunity is there; the demand is there.Foreign DI companies have their own But, success can be squandered if thematurity curve when it comes to risks aren’t managed properly. ” KPMG Global Manufacturing Outlook: Growth while Managing Volatility 15© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • But developed markets cannot be suppliers are nearby. Ever-increasing in second. This will be a particulardiscounted. The Power Solutions natural disasters are also causing priority for US firms, which rank R&Ddivision of Johnson Controls, a nearly companies to think twice about relying and innovation on a par with costUS$40 billion global manufacturer, is so heavily on a single source or single management. AGCO, for example,a case in point. Its lead-acid batteries region for key components. has dramatically increased R&Dsell well in emerging markets where investment. “We’ve tripled the level of Even for emerging market-baseddemand for new cars is soaring, but spending, so it’s now close to manufacturers, the US is third (aftersales remain steady in the US even 3.5 percent of sales, says ” China and India) as a sourcing market.when car sales drop. “If someone Mr. Richenhagen. For Western firms, the US narrowlydoesn’t buy a new car, they have to leads China. “We’re going in both Luvata is investing in both new productsreplace the battery anyway, says Alex ” directions, says Martin Richenhagen, ” and new markets, establishing factoriesMolinaroli, the division’s president. CEO of AGCO, a global manufacturer in Mexico and Malaysia. This helps give“So it’s a tale of two cities; flat or low of farm equipment with nearly US$7 it both geographic and product diversity.percentage growth in mature markets, billion in revenue in 2010. “We’ve got “The [market] changes recently havethen emerging markets building rapidly. ” our China investments, but also in reinforced our strategy of being aThis West-East picture is even more North America we’re going to invest in global player, in multiple end-businessnuanced when it comes to sourcing. expanding one of our existing factories segments. It’s been a good risk mitigatorChina, India and Brazil are all top-five to start manufacturing high horse for us, says Mr. Kickham. “When auto ”targets among survey respondents. power (wheel) factories, for the first was having the most horrible time knownBut developed markets are hardly time in our history.” to mankind, people were still buying MRIbeing abandoned. The US is second, scanners and spending on healthcare. ”the UK fourth and Germany sixth. This An emphasis on new products To support this drive for new productsdevelopment can be attributed to the A second growth theme is a greater and to lower product developmentvolatility of commodity costs, which focus on product diversification and costs, 48 percent of manufacturers arehas added to the appetite of companies innovation. This is a significant shift establishing design centers in emergingto source from closer to home. Higher from recent years. Existing products markets. But talent shortages will beoil prices mean higher transport will be significantly less important in a concern. The availability of skilledcosts, making Western companies existing markets, while much greater workers now tops the list of humanincreasingly inclined to shorten their emphasis is placed on new wares – resource concerns in emerging marketssupply lines. Shorter and simpler in both existing, and new, markets. (cited by 36 percent of all respondents).supply chains also allow firms to hold While cost management remains the There are differences between emergingless inventory, as restocking becomes top priority, innovation and R&D come and mature markets, however.both simpler and quicker if your From which countries do you expect to increase sourcing the most during the next 12 to 24 months? 42% 36% 30% 13% 11% 10% 9% 6% 6% 6% China US India UK Brazil Germany Canada Japan Australia MalaysiaSource: Economist Intelligence Unit survey, 201116 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Insights R&D Tax Considerations • the ownership of the newly created The growing number of design centers IP can only be handled correctly if around the world and other dispersed the set-up of a new design center R&D activities give rise to a growing and its role within the group’s R&D need for better governance and controls framework is clearly defined. for the R&D function. Companies We’ve seen companies that failed to frequently underrate the importance of properly establish and control their Joerg Strater this need even though it serves as the extended R&D activities end up in tax KPMG Global basis for the effective allocation of costs disputes with various fiscal authorities Head of Tax for Diversified and benefits resulting from local R&D. all over the world, an undesirable Industrials Various tax aspects such as: scenario that can be avoided by some • appropriate license fees advance planning. • the recognition of capital gains on the transfer of IP or business functions, Indian Developments use local conditions to their advantage. Adding to this momentum is India’s first As India moves up the value chain in National Manufacturing Policy which manufacturing, more global companies will help to create an eco-system of are making India part of their global national investment and manufacturing supply chain, especially as companies zones to enhance India’s domestic look to build out their R&D centers. production and global competitiveness. Richard Rekhy India is fast becoming recognized The policy aims to increase the KPMG Head of as a producer of high value goods manufacturing sector’s contribution to Advisory, that require substantial engineering India’s GDP from the current 16 percent KPMG in India precision while Indian manufacturing to 25 percent by 2025. continues to diversify as global players Which of the following is the primary focus area of your growth strategy for the coming 12 to 24 months, and the past 12 to 24 months? 44% Existing products in existing markets 25% 21% New products in existing markets 25% 19% Existing products in new markets 20% New products in both new 11% and existing markets 19% Past 6% New products in new markets Future 11% Source: Economist Intelligence Unit survey, 2011 KPMG Global Manufacturing Outlook: Growth while Managing Volatility 17© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Companies based in mature markets North America slightly favor a more inward sectors stands, and thus when theyare especially likely to consider this approach, namely increasing production might be influenced by a boom or hita challenge, whereas manufacturers capacity. by a recession, says Ms. Kux. Other ”based in emerging markets worry about companies have developed detaileddevelopment of executive-level talent. Rigorous approach to risk, cost and demand forecasting tools, often based on demand management statistical views of end-markets. SomeCompanies plan to grow both by track new indicators, such as architecturalincreasing production capacity (chosen by Manufacturers have learned a lot about billings, to gain a forward indicator36 percent of respondents overall) and via risk in recent years. Looking ahead, risk of residential construction, and thusmergers and acquisitions (M&As), joint remains important for all, but will be likely demand for products such as airventures (JVs), and strategic alliances a particular emphasis for Asian firms. conditioning units or building parts.(39 percent). This is not surprising given Various interviewees spoke of theirthat companies are cash-rich after the investments both here and in demand Another crucial aspect of managinglast few years of stringent cost saving forecasting, to manage volatility. volatility is better cost management.measures. Noteworthy from a regional Siemens, for example, has increased And while manufacturers have notionallyperspective is that European respondents its use of scenario planning. “Centrally, embraced the pursuit of growth as aare overwhelmingly in favor of M&As, we look at what the overall decisions strategic priority, none are looseningJVs or strategic alliances (57 percent), are and we get a rough picture of where their grip on costs. From an investmentwhile respondents from Asia-Pacific and in the economic cycle each of our perspective, this will remain the top priority in both West and East. Primary Approach for Achieving New Growth Forming joint ventures, strategic alliances, 44% and M&A 39% 28% Increasing production capacity 30% 22% Investing in research and development (R&D)/ new-product development 20% 5% New sales offices 11% Prior 12–24 Months Next 12–24 MonthsSource: Economist Intelligence Unit survey, 2011 Which of the following aspects of your business will you seek to invest more and/or expand in the coming 12 to 24 months? Percent respondents Cost management 39% Innovation/R&D 35% Production capacity in high-growth markets 32% Production capacity in domestic markets 24% Supply chain resilience 24% Risk management 22% Overall top-line growth 14%Source: Economist Intelligence Unit survey, 201118 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Companies are becoming more functions, improving technology systems Manufacturers will also look to theirsophisticated about how they look at cost to promote collaboration with customers supply chains to manage volatility andefficiencies. The more straightforward and closer relations with suppliers. costs at the same time they focusgeneral and administrative expense on growth. The top two cost-control Delong is focusing on improvingcost-cutting has already been done, measures on which manufacturers its operational cost efficiencies toand to reduce costs further, companies expect to focus in the next 12 to minimize the impact of volatility. GSI,may well have to cut back in what were 24 months involve their supply chains: meanwhile, is actively exploring newformerly “untouchable” departments one is collaborating more closely with upstream partnerships or acquisitionssuch as engineering or R&D. For suppliers (40 percent); the other is to better control costs. Ultimately,example, 41 percent of respondents consolidating their manufacturing or however, given the severity of inputsay they will seek to reduce costs production sites (36 percent). It is clear price increases, many manufacturersby shortening their overall product that supply chain management will be a will be forced to pass on cost increasesdevelopment life cycle. This will key focus for manufacturers seeking to to clients: 63 percent of surveylargely come through restructuring of implement their growth strategies, as respondents agree that this will beengineering and product development the next section details. unavoidable in the year ahead. KPMG Insights Talent in China For foreign companies in China trying to bypass the expat model altogether, I find the two-year expatriate (expat) the discovery, attraction and retention model for foreign multinationals operating of local executive talent is no easy in China to be ineffective. It takes six feat. We advise companies to invest months to learn the business in China in employee retention programs. One and six months to prepare to go home, particularly effective measure is to Peter Fung leaving only a year in between to make an recruit talent in China and send them KPMG Head of impact. It’s hard to make a good return on to the foreign headquarter location for Industrial Markets, investment in that short of a time. extended trainings or secondments. KPMG in China There they learn the corporate It takes a committed person or team willing to come to China and invest the culture and develop the senior-level time to understand the market and build relationships that they will need to strong relationships. I recommend at succeed in the executive roles when least a three-year commitment, but returning to China. preferably five years. Internal Benchmarking an underperforming plant in a mature market in line with one of Organizations have long been its emerging-market plants. They interested in industry benchmarking, compared a range of performance but few take on the arguably tougher outputs, from water to energy task of digging into their own usage, and substituted cheaper raw processes and standardizing data materials. Before the benchmarking Eric Damotte collection and reporting to compare project, the company had assumed KPMG Global Head performance across plants and the discrepancy between the two of Metals locations. In my view, the ability plants came down to labor cost and to derive that kind of business geographical differences. Greater intelligence is enormously important, visibility on a process level allowed especially during times of extreme them to see the real cost drivers and volatility. I know an example of a global adjust accordingly. steel manufacturer that brought KPMG Global Manufacturing Outlook: Growth while Managing Volatility 19© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Insight Which of the following cost control measures will you focus on in the comingBy showing an interesting 12 to 24 months?case of a manufacturer percent respondentsgrasping resource scarcity Collaborating with suppliers to reduce costs 40%as a driver for recycling,the Global Manufacturing Consolidating production/manufacturing sites 36%Outlook underpins that the Realigning our labour force to key growth areas 29%sector is increasingly showing Standardising key inputs/components,leadership by turning global eg. global or regional platforms 28%challenges into opportunities, Implementing shared back office/service centres 24%thus safeguarding sustainableeconomic growth in the Outsourcing 24%long run. Product range rationalisation 22%Yvo DeBoer Reducing our labour force 20%KPMG Special Global Advisoron Climate Change and Sustainability Cutting back and/or holding off 16% on planned investments Exiting unprofitable product lines 16% and/or geographies Source: Economist Intelligence Unit survey, 2011 Case Study Johnson Controls: Raw material price pressures drive new recycling strategiesOne of the implications of the competitive price is crucial, as and recycling operations acrossshift of the world’s center of it’s the biggest single item on its core US and Europeaneconomic gravity eastwards our bill of materials, explains ” markets – no mean featis a fundamental change in Alex Molinaroli, the business given that lead is both heavycompetition for raw materials unit’s president. and toxic. Fortunately, it issuch as lead. Just four years also an eminently recyclable The firm has ramped up itsago, China accounted for 25 to tracking of supply, right down to material. In turn the firm’s30 percent of global demand for specific levels of mining activity. supply situation has easedlead; it now accounts for nearly significantly. “In the US, we More significantly, it has70 percent. This has major now recover and recycle pushed itself to become theconsequences for Johnson 97 percent of the lead we sell, ” world’s biggest lead recycler,Controls’ battery products. says Mr. Molinaroli. Other taking back all old batteries to“The biggest part of our core manufacturers will no doubt provide a steady supply. Thislead-acid business is lead, so be assessing where they can involves collection, distributionthe ability to secure lead at a follow suit.20 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Insight Advanced Cost Management R&D staffs and integrated them into core product groups to get the right Companies are still closely watching products to market, faster. We’re cash expenditures and while there seeing an increased focus now on the is more emphasis now on growth development of global design standards, than two years ago, many are processes, and systems to enable developing approaches to more tightly design activities to occur as if in a virtual Doug Gates scrutinize new product development global design center. This provides KPMG Principal, expenditures and expected ROI. Many greater design flexibility, which in turn Advisory, Business DI companies have streamlined their supports global build flexibility. Effectiveness, KPMG in the US KPMG Global Manufacturing Outlook: Growth while Managing Volatility 21© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Insight Loek Helderman Head of Global Tax Efficient Supply Chain Management, KPMG in the Netherlands Supply Chain Restructuring clients to revisit these factors to prevent possible Today’s environment demands an integrated erosion of the commercial benefit or bottom-line supply chain that takes a holistic approach both efficiency. inside and outside of company walls. From an external perspective, an integrated From an internal perspective, KPMG’s Value supply chain builds on relevant supplier Chain Management approach ensures that knowledge and innovation capabilities beyond supply chain decisions are not made in a vacuum. those that are internally available. To effectively When business and supply chain restructurings manage supplier relationships, I often advise take place, our plans integrate related factors in clients to establish a dedicated supplier account addition to the commercial aspects, such as: management organization that is aligned to the strategic objectives of the business, and fully • Tax integrated into the company’s product innovation • People/HR platforms and R&D function. This is often best achieved by developing partnerships with a • Legal & regulatory portfolio of strategic suppliers and combining a • Finance, accounting and reporting. benefits-sharing mechanism to improve quality If any additional developments in supply chain and service levels. and supplier management occur, we encourage22 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG InsightGraham SmithKPMG Global Head of Engineering & Industrial ProductsAfter a year of uncertain recovery and “Cost management isn’t goingcontinued uncertainty, attitudes within away, but leaders in thethe Engineering and Industrial Products(E&IP) sector remain cautious, according sector know that competitiveto Graham Smith, head of KPMG’s E&IP differentiation will come frompractice. “Last year, the predominant innovation and R&D.”focus was on cutting costs. This year, it’sall about optimizing the back office and Smith expects engineering and industrialsupport functions, making previous costimprovements permanent and avoiding companies to channel cost savings toward Graham Smith new and faster product development andthe ‘cost boomerang’ effect where costs strategic acquisitions that will strengthencreep back in.” their product portfolio and give them a leg up in key geographies.To that end, companies are doublingdown on performance measurement. “Product development and speed ofSmith observes, “management is taking response are key as flexible and morea much closer look at how budget dollars nimble organizations will win more marketare being spent and what the return is on share by taking it from competitors inthat investment. That emphasis creates ” the current economic climate in maturea domino effect across the organization. markets, Smith asserts. Greater ”“Product managers and process owners consolidation will take place as stronger,have much less tolerance for waste, ” leading players refine their businessadds Smith. “They know such inefficiency models and enter into more joint venturesacts as a drag on results and may lead and partnerships in the emerging marketsto reduced budget allocations for the of Brazil, Russia, India and China (BRIC),unit going forward. As a result, many ” as well as other accelerating economies.more organizations are refining their key “Having shored up their operatingperformance indicators to monitor this on structures over the past two years, manya continual basis, embedding them in the E&IP organizations are now well-poisedculture of the business and using them to to seize opportunities in high-growthguide spending decisions. markets. This in turn will mean revisiting the appropriateness of their operatingBut while E&IP companies are looking models to ensure they are lean, flexible,to capitalize on efficiencies made over contain minimum fixed costs, and canthe last 12 to 18 months, most are intent deliver an acceptable shareholder return. ”on growing top-line results as well. KPMG Global Manufacturing Outlook: Growth while Managing Volatility 23© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Reworking supply chainsto support growthGiven the highly varied nature of and inputs (45 percent). According to for by raw materials. AGCO has set upmanufacturing, supply chain strategies survey respondents, these are the top an internal process to standardize itsalso vary widely. Depending on the two supply chain initiatives that firms production techniques across its globalsector, some are highly centralized plan to embrace. production network. For example,while others are highly distributed, for it is consolidating its manufacturingexample. Nevertheless, a number of The appeal is clear: standardizing platform for midsize tractors to createtrends stand out: inputs across several products a single platform. It is also constructing a new factory in China, to be launched• A shift toward standardization can help reduce the number of in 2013, that will be used to build a• Increased localization and materials a company uses and, by single drivetrain for its various midsize responsiveness concentrating on fewer materials, tractors. “The reason we’re doing this is that we expect significant cost• Tighter collaboration with improve its purchasing power. savings, of around 600 to 800 basis suppliers Standardized processes are similarly points, says Mr. Richenhagen. In the ”• A greater emphasis on risk beneficial, enabling companies to share longer term, it will also be used as a management. expertise from more efficient sites. local production base. AGCO, for example, has a major But standardization is not withoutStandardization of parts and initiative under way to improve risks. Dr. Steve New, a Fellow at Oxfordprocesses profitability, based partially on University’s Säid Business School,One priority for manufacturers is standardization. The project aims to notes that some manufacturers thatstandardization, in terms of both improve the company’s cost of goods have taken standardization too far haveproduction processes (55 percent) sold, 75 percent of which is accounted created homogenous product lines that may fail to engage consumers or cater to the specific needs of customers.KPMG Insight Dr. Alexander Riedel KPMG Principal, Advisory, KPMG in Germany Now that certain markets such as automotive years will require a greater level of coordination, are recovering, many are concerned over cooperation, and collaboration between OEMs expanding too rapidly given uncertainty with and suppliers. Prerequisites for success will long-term market signals. Realizing market include the tight alignment of demand forecasts, potential over the next 5 to 10 years will require early sharing of new product concepts, and risk a greater level of coordination, cooperation, and sharing on capital expenditures and new product collaboration between OEMs and suppliers. To development initiatives. optimize market potential over the next 5 to 1024 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Global Manufacturing Outlook: Growth while Managing Volatility 25© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Given the shift toward a greater focus products. Forty-three percent of committed to. However, for some firms,on new products, this is a risk that survey respondents selected this as seeking to bring production closer tomanufacturers will need to consider as a priority for their businesses, after end-customers raises another tension:they promote standardization. Another standardization of inputs across product a desire to consolidate manufacturingchallenge will be managing the tensions lines (45 percent). This is especially and production sites, as noted earlier, inthat will arise between sales and critical for emerging market firms, order to better manage costs.procurement, as one function tries to second only to process standardization. Yet bringing supply chains closer topush new products into the market while Bringing production closer to clients end-customers is unavoidable for somethe other works to standardize inputs (cited by 33 percent of respondents) will manufacturers. Johnson Controls’(see case study Luvata – managing the make it easier to be more responsive Mr. Molinaroli notes that the naturetension between product uniqueness to changing demand patterns, although of its battery business makes itand input standardization on page 27). some manufacturers would also benefit fundamentally a local one. Because of from reduced distribution costs. “The the weight and the materials used inIncreased localization and problem with buying from China is the company’s batteries, a global supplyresponsiveness that to do it well you need to buy in chain does not work. “We build ourA second theme, directly aimed huge batches, says Dr. New. This ” products and our supply chain all in theat supporting the push into new makes it hard to respond to shifts in the same region we serve, he says. ”markets, is in localizing or adapting marketplace, once certain volumes are Which of the following is applicable for your business in the coming 12 to 24 months, in terms of its supply chain strategy? We will increasingly seek to standardize 55% our production processes across all sites Where possible, we will increasingly seek to 45% standardize our inputs across product lines We are increasingly focused on customization/ 43% localization of our products for key customers/markets We will seek to reduce costs by shortening 41% our overall product development lifecycle We will seek to shorten our supply chain, 33% to bring production closer to key clients/markets We will divest ourselves of products that are not core 32% to our business to concentrate on our capital allocation We will acquire our suppliers to reduce the risk of 31% supply and price/margin volatility of key inputs Source: Economist Intelligence Unit survey, 201126 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Insight Gus Gaeta KPMG Principal, Advisory, Business Effectiveness, KPMG in the US The Shift to Nearshoring confident that the volume needed to justify a The practice of “near-shoring, or “re-shoring” to ” major move is there and will remain. bring distant operations closer to the end market 2. Seek manufacturing centers of excellence has become increasingly more important within Have a clear perspective of the capabilities that DI and across other industries that have significant the location you are considering has to offer, manufacturing or assembly elements. While the making sure there is an abundance of the skill original motive behind off-shoring was to deliver cost sets for your type of manufacturing. Look for savings by allowing companies to take advantage of manufacturing centers of excellence within your labor, tax, or regulatory incentives, now rising costs field. in labor and logistics – as well as high inventory carrying costs caused by longer lead times – are 3. Build strong procurement starting to dilute those savings. These factors are Ensure your procurement organization is strong causing companies to revisit their business models. enough to help you qualify sources and manage As they embark on this process, I advise them to be and monitor suppliers on a global basis. Your diligent in choosing new locations as they expose suppliers will need to be global and flexible themselves to intellectual property, currency, enough to follow your footprint. environmental, compliance and supplier risks that 4. Expand existing operations must be hedged by proactive business-continuity Make sure that you are fully leveraging any local planning to minimize supply chain disruptions. facilities and capabilities you may have rather As companies redistribute their global capabilities, than starting from scratch. It is easier to build I often suggest the following tips: upon existing capacity and infrastructure to “expand a campus. Campus environments also ” 1. Analyze demand lend themselves well to modular manufacturing Examine how stable your demand is in a because it is easier to add on, adapt and take prospective region since you need to be away capabilities as needed, helping to increase flexibility and responsiveness. Case Study Luvata: Managing the tension between product uniqueness and input standardization Manufacturers’ strategy of expanding into industry, works to make these smaller and new product areas can collide with the desire lighter, using new materials. “We’re trying to to increase supply chain standardization. push the boundaries to make more efficient, Luvata is a case in point. One of the non-standard products, he says. ” company’s strategic aims is to expand “All this causes strong, healthy tension into unique product areas, to avoid overly between the guys that manage the supply commoditized markets. chain and those managing customers, says ” However, Bob Kickham, senior vice-president Mr. Kickham. Part of the solution is closer for procurement, is pushing standardization collaboration with suppliers. “We’re trying to keep costs under control. “All buyers are to create more and more forums not to beat for standardization, he says. “Unfortunately, ” up suppliers on raw price, but to look at how our strategy is around getting niche and we can jointly take our costs and share value getting close to customers. For example, ” on that, he says. “If we can look at smarter ” one of the firm’s operating units, which ways of reducing costs, while both making supplies tubes to the air conditioning profits, that’s a good place for us to be. ” KPMG Global Manufacturing Outlook: Growth while Managing Volatility 27© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG InsightDr. Gerhard DaunerEuropean Leader for Diversified Industrials, KPMG in GermanyDr. Gerhard Dauner, KPMG’s European Dr. Dauner explains. Furthermore,Leader for Diversified Industrials (DI), moderate growth expectations insees uncertainty making a return. “At Europe force entrepreneurs to thinkthe end of last year, says Dr. Dauner, ” about broadening their presence in“people began to feel more optimistic. emerging countries that not onlyOrder intake was increasing and represent attractive customersconsumer spending looked like it might and offer the potential for raisingmake a return. But lingering questions ” additional cost advantages in theirover the debt crisis in Europe, the slow supply chain. As DI entities flex theirrecovery in the United States and rising business models, many are taking a Dr. Gerhard Daunerinflation in emerging markets have look inward to see if they have thecast new doubts. “As a result, he says, ” right competencies and processes to“DI players in Europe are stepping capitalize on long-term trends.back and questioning whether this is Dr. Dauner notes, “DI organizationsthe right environment to make major face a shortage of engineers andacquisitions. ” operations experts, not only in Europe, but in key locations around the globe. ”With volatility expected to remain aconstant well into next year, European That issue has implications on theDI companies are partnering much growth agenda as well. “DI players inmore closely with suppliers. “Whereas Europe recognize that they must investone year ago, says Dr. Dauner, “the ” in innovation and tools for growth. Butemphasis was on risk and financial many of my clients are grappling withhealth checks to ensure supplier the issue of how to allocate their R&Dsolvency, now it’s much more about business globally and where to positionmanaging the information flow. Today, ” their competency centers. To gain ”managers are spending far more time insight, Dr. Dauner says, DI organizationsexchanging information to gauge are digging deeper into their businessdemand, adjust inventories and gain as data.much visibility as they can in order to beable to make short-term adjustments “We talk about businessif required. However, it is crucial not intelligence,” explains Dr. Dauner,only to maintain the flexibility to reduce “but the challenge is turning thatcapacity in periods of recession, but alsoto effectively extend production volume into strategic and operationalin order to seize business opportunities planning intelligence in order toin times of economic revival. tease out emerging megatrends andWith so much volatility, it is inevitable position the organization to respondthat companies in industrial marketsconsider making structural changes to on a regional basis.”their operating model in order to secure Mastering those issues is key toa globalized customer and supplier sustainability. Sustainable businessbase, while at the same time delivering used to be thought of as just a costoptimized cost structures. However, issue. But Dr. Dauner says DI leaders, particularly in Europe, see it as a core”The future of cost management strategic issue, one that informswill not necessarily be about better sourcing, partnering and growth. “Ultimately, sustainabilitytrimming costs, but rather about is at the heart of profitability andbeing innovative in achieving serves as one of the ways thatsustainable cost efficiency savvy organizations are looking to ride out continuedturning to proper working capital market turbulence. ”management solutions,”28 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Closer collaboration with suppliers One example of Siemens’ successful collaborationCost, quality and reliability, the top three priorities for supply with suppliers can be found with printed circuit boards,chains cited in last year’s research, remain at the top this year. where slight size adjustments substantially reduceYet the importance of trusted relationships with suppliers waste on the supplier side. “Savings potential likehas nearly doubled. One obvious reason is the need to these only become obvious when we [collaborate] withdeepen relationships in order to help ride out volatility in suppliers, says Ms. Kux. ”prices. A hallmark of this is a rise in longer-term contractswith suppliers, aimed at stabilizing key input prices. One-in- A greater emphasis on risk management andthree survey respondents says his or her firms are seeking to supply chain transparencyincrease the use of long-term contracts, while most others The past few years have served as a wake-up callwill retain existing contract durations. Another element is for many manufacturers. When asked to rate thespeed: working more closely with suppliers can help speed effectiveness of various aspects of their supply chain,up operational processes and information flows, which in turn survey respondents are least confident about risk. Forcan assist with both cost and quality. example, nearly one in five (18 percent) describes his or her organizations as “not effective” at managingCloser engagement with suppliers also supports the drive to supplier risk audits and a further one in three (32develop new products. Siemens, for example, is encouraging percent) as only “somewhat effective. But the depth ”supplier involvement much earlier in its projects. “What of the recession, the impact of various natural disasterswe do more and more is to collaborate cross-functionally and a hugely unpredictable economic cycle have alland bring our suppliers and R&D teams together in order to forced firms to hone their risk management practices.explore new ways to jointly optimize functionality and cost, ” “Our risk management function includes the supplysays Ms. Kux. This activity was initially met with skepticism, chain and goes all the way down to alternative suppliers,given fears of exposing intellectual property. These worries alternative materials, alternative locations, wherehave receded, however. “Combining the supplier’s capacity is, where we need capacity allocated and soinnovational strength with our own adds value by revealing on, says Mr. Molinaroli. “It’s all incredibly more robust ”more efficient ways to meet specifications, says Ms. Kux. “It ” than how it used to be. ”doesn’t help if suppliers talk to a supply chain managementguy, and he then talks to R&D. ” Regarding your supply chain as a whole, which of the following are the most important attributes? Cost 58% 66% 55% Quality 57% 45% Reliability 49% 30% Trusted relationships 14% 22% Flexibility 41% Access to talent 15% 11% 14% Access to technology/R&D 16% 8% Proximity to production sites 10% 2011 Ability to co-create on new 7% 2010 products/components 9% Source: Economist Intelligence Unit surveys, 2011 and 2010 KPMG Global Manufacturing Outlook: Growth while Managing Volatility 29© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Many survey respondents say they are University’s Säid Business School. investing in risk management, especially As a result, even firms with relatively in technology, to improve supply sophisticated supply chains can be chain visibility (49 percent). Japan’s impeded by disruptions. devastating tsunami highlighted how Hence the notion of supply chain little many manufacturers knew about visibility has been gaining traction: their supply chains. Increased supply adding technology to gain a better chain complexity in recent years has understanding of where risks might been inevitable for many, as products lie will be the primary focus for have become more complex. “Once manufacturers polled for this report. things have a microchip within them, “Most organizations have good visibility your supply chain is immediately 50 of their tier-one suppliers, and then it times more complex, says Dr. Steve ” gets progressively cloudy beyond that, ” New, a research fellow at Oxford says Dr. New. Which of the following tools/approaches will your organization rely on most in the coming 12 to 24 months to identify risk in your supply chain? Use of technology to increase visibility across the supply chain 49% Developing the risk management capabilities of key suppliers and/or setting appropriate standards 45% Conducting assessments of our supply chain processes 45% Dashboards and alerts to provide early warning of issues 40% Use of simulations/scenario planning/impact assessments/continuity planning 31% Increasing personnel/resources 27% for our risk function Source: Economist Intelligence Unit, 2011KPMG Insight Kimberly Rodriguez KPMG Principal, KPMG in the US Tips for de-risking global supply chains: 1. Look beyond tier 1 suppliers to have real transparency in your supply chain. 2. Expand and correlate risk parameters to include geopolitical, economic and environmental risk issues in addition to the basic quality and delivery factors and build these factors into your sourcing and pricing decisions. 3. Make all associated risk data available in real time, regularly updated and benchmarked across the supply chain. 4. Evaluate your supply chain globally and implement processes regionally to account for the dramatic differences in supplier maturity, access to information, and quality.30 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • Firms will also build on closer supplier supplier networks for which 51 percent same components to combat risk, itcollaboration to help develop the risk of the survey respondents are striving. is sometimes not feasible to do so.management capabilities of key partners Overall, respondents’ strategies toward “You can’t just change an engine;(45 percent). Other tools, such as risk number of suppliers are fairly even: this is a major operation, like opendashboards (40 percent) and the use the proportion of firms planning to heart surgery, so it would take a hugeof scenario planning or simulations (31 increase the suppliers’ list (29 percent) amount of engineering and planning topercent), are also gaining traction. is balanced out by those that seek to ” change suppliers, he says. Instead, a reduce it (28 percent). greater emphasis should be devotedBeyond the tools themselves, many to understanding the financial healthfirms are also working to ensure that In some instances, however, of suppliers. Whatever the approach,they have multiple suppliers for key options may be limited. AGCO’s manufacturers will be focusing on suchinputs. This is a balancing act, however, Mr. Richenhagen says that despite risk practices in the years ahead.as having too many suppliers makes the importance to manufacturersit difficult to develop the streamlined of having multiple suppliers for the KPMG Insight Supply Chain Transparency continue to look for ways to reduce cost and the number of suppliers, they Since the supply chain represents a will need the visibility in their supply significant share of the typical operating chain to avoid undue concentrations cost for a manufacturing company, even in any area and to get the flexibility a slight uptick in productivity can create they require in order to quickly react considerable savings. Rationalizing the to changes in demand. Hence, we are Dr. Gerhard Dauner supply base is one way to do this, but seeing demand from our clients for tools European Leader the disaster in Japan underscored the and approaches that provide greater for Diversified need for balance. As DI organizations transparency across the supply chain. Industrials, KPMG in Germany KPMG Global Manufacturing Outlook: Growth while Managing Volatility 31© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • ConclusionAs manufacturers pin their hopes on a return to growth,they will do so with fresh lessons in mind. Importantly,most are looking ahead to the coming years – withmuch expected macroeconomic volatility – with arobust approach to cost and risk management. In short,companies are:• Employing sophisticated cost management techniques. Rising or volatile input prices are here to stay. Becoming smarter about cost management – rather than rudimentary cost-cutting – will become the ethos of the company and an important factor in every decision made.• Improving and deepening both the corporate and supply chain risk management team and tools, and linking them to more detailed demand forecasting. Leading manufacturers are taking more vigorous measures to assess end-market shifts in order to respond more rapidly.• Gaining a deeper understanding of the precise make-up and health of supply chains, beyond only tier 1 firms. Increasingly complex supply chains have exposed firms to hidden risks several tiers down. Manufacturers able to gain visibility of these relationships will be better positioned to identify and react to geographic and financial vulnerabilities.• Increasing collaboration with, and supporting, key suppliers. Especially as cost pressures rise, deeper relationships with suppliers – encompassing not only supply chain personnel, but also R&D, finance and other functions – will continue to increase in importance. As one executive describes it, manufacturers have to realize that while the old industrial model was essentially a solo sport, with vertical integration “from womb to tomb, the new ” model is far more of a team sport, with greater interdependencies requiring far more collaboration.32 KPMG Global Manufacturing Outlook: Growth while Managing Volatility© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Global Manufacturing Outlook: Growth while Managing Volatility 33© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
    • KPMG Global Diversified Industrials Leaders:Jeff DobbsGlobal Head of Diversified IndustrialsT: +1 313 230 3460E: jdobbs@kpmg.comEric Damotte Graham SmithGlobal Head of Metals Global Head of Engineering & IndustrialT: + 349 1456 3406 ProductsE: edamotte@kpmg.es T: +44 20 7311 4731 E: graham.smith@kpmg.co.ukDr. Gerhard DaunerEuropean Leader, Diversified Joerg StraterIndustrials Global Head of Tax for DiversifiedKPMG in Germany IndustrialsT: +49 89 9282 1136 T: +49 211 475 8381E: gdauner@kpmg.com E: jstrater@kpmg.comMarty Phillips Andy WilliamsGlobal Head of Aerospace & ASPAC Leader for Diversified IndustrialsDefense KPMG in SingaporeT: + 1 678 525 8422 T: +656 411 8088E: mwphillips@kpmg.com E: andrewmwilliams@kpmg.com.sgAdditional Key Contacts:Yvo De Boer Douglas Gates Kimberly RodriguezKPMG Special Global Advisor KPMG Principal, Advisory KPMG Principal, AdvisoryClimate Change & Sustainability Business Effectiveness KPMG in the USKPMG in the UK KPMG in the US T: +1 313 230 3000T: +44 20 7694 2931 T: +1 703 286 6691 E: kdrodriguez@kpmg.comE: yvo.deboer@kpmg.co.uk E: dkgates@kpmg.com Michele HendricksDavid Frey Loek Helderman Global Executive for DiversifiedKPMG Partner, Advisory KPMG Head of Global Tax Efficient IndustrialsKPMG in China Supply Chain Management KPMG in the UST: +8 610 8508 7039 KPMG in the Netherlands T: +1 212 872 3641E: david.frey@kpmg.com T: +31206 561415 E: mhhendricks@kpmg.com E: Helderman.Loek@kpmg.nlPeter Fung Martha CollyerHead of Industrial Markets Richard Rekhy Senior Marketing ManagerKPMG in China Head of Advisory KPMG in CanadaT: +8 610 8508 7017 KPMG in India T: +1 41 6 777 3505E: peter.fung@kpmg.com T: +91 124 307 4303 E: mcollyer@kpmg.ca E: rrekhy@kpmg.comGus GaetaKPMG Principal, Advisory Dr. Alexander RiedelBusiness Effectiveness KPMG Principal, AdvisoryKPMG in the US KPMG in GermanyT: +1 312 665 2389 T: +49 89 9282 1210E: ggaeta@kpmg.com E: ariedel@kpmg.comkpmg.comThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressedherein are those of the survey respondents and do not necessarily represent the views and opinions of KPMG International.© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independentfirms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority toobligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any suchauthority to obligate or bind any member firm. All rights reserved.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.Designed by Evalueserve.Publication name: Global Manufacturing Outlook – 2011Publication number: 110841Publication date: September 2011