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GlobalManufacturingOutlook:Growth whileManaging VolatilityGlobal research commissionedby KPMG International from theEconom...
Interviewees                                                                                            PrefaceBob Kickham...
About the surveyA total of 220 senior manufacturing executives participated in thesurvey. All respondents are responsible ...
Foreword                                                                                 At the end of 2010 it looked like...
Content                                                                            Executive summary                      ...
Executive summary                                                                        Despite a generally profitable ye...
Some of the key findings emerging from our research include:                                                              ...
The businessoutlook:growth ahead, butrisks loom                                                                           ...
How optimistic are you about your business outlook in the next                                    12 to 24 months?        ...
The Baltic Dry Index (BDI), an index                                              past months, and is likely to remain    ...
Price pressuresBut the most pressing challenge for                                              and transport and distribu...
Growth and price forecasts2010–2015                                                                                       ...
KPMG InsightMarty PhillipsKPMG Global Head of Aerospace & DefenseThe aerospace and defense (A&D)                          ...
Striving for growth                                                                                 Despite all these chal...
KPMG InsightEric DamotteKPMG Global Head of Metals“A weaker US dollar and steady                                          ...
Growth strategies:managing volatilityManufacturers are reshaping their                                                Oper...
KPMG InsightAndy WilliamsKPMG ASPAC Leader for Diversified Industrials, KPMG in SingaporeAs the world’s second largest eco...
But developed markets cannot be                                                  suppliers are nearby. Ever-increasing    ...
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
Global Manufacturing Outlook: Growth while managing volatility
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

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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 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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Transcript of "Global Manufacturing Outlook: Growth while managing volatility"

  1. 1. GlobalManufacturingOutlook:Growth whileManaging VolatilityGlobal research commissionedby KPMG International from theEconomist Intelligence Unit
  2. 2. 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.
  3. 3. 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.
  4. 4. 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.
  5. 5. 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.
  6. 6. 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.
  7. 7. 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.
  8. 8. 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.
  9. 9. 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.
  10. 10. 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.
  11. 11. 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$9,000 by mid-2011. 2011: industrial raw materials prices Procurement, Luvata are expected to rise nearly 30 percent,Unfortunately, executives do not according to the Economist Intelligenceanticipate much relief. A majority of Unit, on the back of a 44.5 percentsurvey respondents expects price increase last year (see Growth and priceincreases on raw materials, energy, forecasts). Some relief is forecast for 2012. What do you see as the biggest challenges for your business in the next 12 to 24 months? Percent respondents Price volatility on key cost inputs 44% Intense competition and pressure on prices 40% Uncertain demand 35% Risk and reliability in the supply chain 27%Efficiency in R&D/product development process 24% Increased regulation in our industry 23% Managing geopolitical risk 21% Improve technological efficiency 15% Prospect of tax increases 15% Lack of access to capital or credit 10%Source: Economist Intelligence Unit survey, 2011. KPMG Global Manufacturing Outlook: Growth while Managing Volatility 9© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  12. 12. Growth and price forecasts2010–2015 2010e 2011f 2012f 2013f 2014f 2015f Real GDP growth (PPP exchange rates) World 4.9 4.1 4.2 4.3 4.3 4.3 OECD 2.9 2.2 2.3 2.3 2.4 2.5 Non-OECD 7.4 6.5 6.5 6.4 6.5 6.5 Real GDP growth (market exchange rates) World 3.8 2.9 3.2 3.2 3.1 3.2 North America 2.9 2.4 2.5 2.5 2.5 2.6 Western Europe 2.0 2.1 1.6 1.9 1.7 1.7 Asia & Australasia (including Japan) 6.5 3.8 5.1 4.5 4.4 4.5 Oil prices: Brent; US$/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.
  13. 13. 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.
  14. 14. 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.
  15. 15. 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.
  16. 16. 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.
  17. 17. 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.
  18. 18. 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.

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