1. I N DU STR I A L MA R K E T S
New Markets
Cost, insight and opportunity
KPM G I NT E R N A T I O N A L
2. “You may not be able to get the results
you want today in China, but the point
of being there is this: whoever wins
in China in the next 5 years will
win in the next 100 years.”
– CFO, a U.S. industrial and
construction machinery maker.
3. New Markets: cost, insight and opportunity 1
Foreword
How do companies seek to increase and secure
value from operations in new markets?
Companies often ask KPMG new markets, as seen by CEOs and and value in terms of ability to deliver
member firms to help them compare CFOs at some of the world’s biggest sustainable profits in the markets and
themselves with their peers. The manufacturers. Using an extensive businesses of the future. The survey
Global Manufacturing Benchmark series of telephone surveys and concentrated on value in four specific
Survey was designed to meet this personal interviews with companies areas: risk, regulation, compliance,
need. This survey compares value in the automotive and industrial and new markets. In the absence
creation and preservation in products sectors, executives at 269 of a commonly accepted definition
269 manufacturing companies with manufacturing companies were asked of corporate value, the survey does
global operations and allows each to cite their key concerns about new not define ‘value’ itself. Instead it
participating company to generate market operations – whether selling measures a number of underlying
a unique comparison of their in, manufacturing in, or sourcing from performance and operational indicators
performance with peers in their own new markets – and then go on to which together form a database from
industry, as well as across industries. break down these areas of concern which companies can draw conclusions
into detailed specific management about value creation.
As part of a recent wide-ranging survey challenges over the next five years.
of large manufacturing businesses
across the world1, KPMG International Today, companies are focused on the
created a new objective score of increase of value – both present-day
how corporate value is derived from valuation in corporate asset markets,
Bill Kimble Uwe Achterholt
Global Chair, Industrial Markets Global Chair, Automotive
KPMG in the U.S. KPMG in Germany
1 KPMG’s Global Manufacturing Benchmark Survey, 2008
4. 2 New Markets: cost, insight and opportunity
New Markets:
cost, insight and
opportunity
Companies surveyed report that responding to the
challenges of new market competition and the opportunities
of new market production and sales are top of the business
agenda now and for the foreseeable future.
Manufacturing companies agree that Companies were asked: which of these is
the reason for that interest is growth: the main business growth strategy for your
the big four new markets (Brazil, company over the next five years?
Russia, India and China, – the ‘BRICs’)
are growing at between two and five 100%
times the rate of growth in the older 90%
industrial economies – while many 80%
manufacturing companies are positive 70% Automotive equipment
about manufacturing in Brazil, India and 60% Automotive components
China, they remain cautious or neutral 50% Industrial manufacturing
on the prospects for manufacturing 40% Aerospace
investment in Russia. The view of a 30% Metal industry
20%
Other
European industrial products group
is typical: “for us Brazil is expanding, 10%
China is expanding. India probably 0%
Enter new
countries
Gain new
customers in
existing countries
Sell more
products to
existing customers
will be expanding. Russia is a maybe.
The issue with Russia is that Russian
customers need to make a technology
leap if they are going to buy from us”.
Companies report that their growth
Source: KPMG International 2008
strategies are more concentrated on
winning new customers and new
business in existing markets than on Brazil, Russia, India and China as
entering new markets. However, in existing markets (as suggested by
interviews, companies stress that in the above graph).
many cases they are already active
in new markets, and therefore count
5. New Markets: cost, insight and opportunity 3
Two issues dominate corporate Manufacturing in low-cost east Asia – A large Indian auto parts maker with
concerns regarding sourcing from or especially China – is more problematic, global auto customers adds that
manufacturing in low cost economies: although several companies argue that “on quality, we consider India to be
cost and quality. Some companies quality failings are often the fault of the as good as it can be. China is not so
surveyed also voice concerns about the manufacturer rather than the location. good, but training and investment will
challenges of managing through joint- The CFO of one large east Asian auto push that quality up. There is no doubt
venture approaches, but these are in the components maker says that his that quality is the biggest challenge in
minority as most companies report that company remains reluctant to commit low-cost country sourcing, and getting
the manufacturing that they consider to manufacturing in China on quality and keeping the right skills is the next
critical is almost always accomplished grounds: “quality is very important to most difficult issue”.
through wholly owned subsidiaries. a manufacturer in our business.
We make things like brakes – these
New Markets: quality challenges are critical components that lives
Many companies surveyed remained depend on. We would do a lot more
concerned about the achievement manufacturing in low-cost locations if
of quality in emerging market we could be sure of the quality”.
locations. However, companies
with manufacturing operations in Companies were asked: are you engaging in,
intermediate cost locations – such as or considering, low-cost country sourcing for
economies on the European periphery – production?
frequently report very positive results
on both cost and quality. “We have
more quality issues in high-cost
70%
countries than in low-cost countries,”
says one European industrial machinery 60%
maker. “We make all our critical 50%
Automotive equipment
components in places such as the 40% Automotive components
Czech Republic and Portugal: we have 30% Industrial manufacturing
low cost and the highest quality.”
20% Aerospace
And this company adds: “achieving Metal industry
10%
quality from low-cost markets is entirely Other
dependent on how long you have had 0%
Considering
Engaged in –
but only recently
Engaged in – for
several years
Neither
engaged in
nor considering
to manage the issue”.
Source: KPMG International 2008
6. 4 New Markets: cost, insight and opportunity
Many companies report that achieving Some companies, especially those less concern. “Labor costs may be
quality from low-cost manufacturing domiciled in emerging markets, are rising in low-cost countries, but the
depends less on location and more on concerned about the relative rise in absolute differential between low-cost
recruitment, training and error correction. emerging market direct labor costs. and high-cost is still increasing,” says
“The fact is people always want to “The rise in Indian labor costs means a European industrial and automotive
improve: look at manufacturing in a that a huge advantage is becoming products group. “For us it is still the
location like the Czech Republic, and a smaller advantage,” says an Indian case that Germany is seven times
how passionate they are about achieving automotive components group. more costly than the Czech Republic.”
quality levels,” says a European “Even for a company that50% a large
has
industrial products group. “You must labor pool to draw upon, it is still an
never underestimate the work ethic emerging problem.” For companies
and the motivation of your partners.” domiciled in western Europe and the
U.S., relative cost increases are of
New Markets: cost and
productivity challenges
Almost without exception, companies
report that productivity rather Companies were asked how significant
than direct labor cost is the key to low-cost country sourcing was in terms
profitable manufacturing operations of cost and quality on a scale of 1-5
in new markets. “Labor costs are
50%
not increasing,” says a large Indian
auto components maker with global 40%
customers. “The cost per person is
increasing, but so is productivity – 30%
so overall there is no cost increase.”
Cost
20% Quality
10%
0%
1 Worse quality than
local sourcing
2 Somewhat worse quality
than local sourcing
3 The same quality
as local sourcing
4 Somewhat better quality
than local sourcing
5 Better quality than
local sourcing
5 Significant
reductions
1 No cost reduction
Source: KPMG International 2008
7. New Markets: cost, insight and opportunity 5
KPMG comment
Beyond low-cost manufacturing KPMG firms believe there are three • Implementing corporate social
Companies should treat low-cost critical issues for global managers. responsibility. The global networks
manufacturing solutions as part of of manufacturers are getting more
a larger strategy that embraces • Identifying true cost. Traditional complex, and more challenging
the total supply chain. Low-cost manufacturing operations do to manage. One dimension of
manufacturing is not a strategy that not represent the greatest cost this complexity is the difficulty of
should be pursued in isolation: today or risk areas for companies that implementing the corporate social
companies need to understand that see themselves primarily as responsibility agenda. Companies
as their operations grow increasingly manufacturers. People often assume that focus on manufacturing costs
global, the risk and opportunity profile that manufacturers’ greatest costs alone without considering the impact
of their supply chain operations has are in labor, whereas in fact, the on their CSR agenda are not truly
grown correspondingly complex. greatest costs are associated with optimizing costs or managing risks.
distribution and logistics. These are Driving the efficiency of processes
Companies surveyed for this report also areas which are most likely to through lean manufacturing or Six
say that new market access is more be fully outsourced, which itself Sigma is fine, but companies need
important than low labor costs; that creates risk. Companies should ask to take a broader and multi-faceted
there is no obvious correlation between themselves whether they understand approach that sees operations in the
labor cost and quality; and that there the true risks in distribution and global context.
are no hands-off management solutions logistics.
in new markets. These are just some Companies that do understand the
of the indicators of the fundamental • Choosing and using information. wider risk and cost implications of
challenge of globalized operations. When companies expand operations globalized operations can be shown
Operating with a global footprint globally, managers need access to a to achieve a higher level of profitability.
can increase risk very significantly. much wider base of information than But taking the holistic view is not easy.
Companies should find new ways when they operate in tried-and-tested Many companies can find it difficult to
of understanding and managing markets. How companies gather and step outside their own world. However,
those risks. collate and analyze information is when you are committed to a path that
becoming a critical issue. This is not inevitably leads to greater complexity,
How should companies integrate low- a technology challenge. The issue is you should also have internal and
cost manufacturing into a larger total knowing what it is that companies external perspectives if you are going
supply chain strategy? need to know, being able to analyze to manage that complexity.
it and act on it.
8. 6 New Markets: cost, insight and opportunity
However, in interviews, companies investments remain on hold. This view However, one U.S. construction
said that labor availability, flexibility and is supported by research from the machinery maker considers
productivity in emerging markets were World Bank2, which shows that despite that industrial and automotive
more important than direct labor cost. Russia having one of the world’s most manufacturers can protect their
“Labor is not an issue for us,” says an highly educated workforces, industry- intellectual property more easily than
Indian industrial products manufacturer specific skill shortages remain the other businesses. “The Chinese are
with global clients. “In Hyderabad second most important constraint on very entrepreneurial, and there is a real
we have flexible hiring – we can hire growth (after tax levels) according competitive threat there,” says the
somewhere between three times to 1,000 large and medium sized CFO of this company. “But we are less
and five times our current workforce companies surveyed by the World worried about the intellectual property
without difficulty, tomorrow if we want Bank. issue than say a consumer goods
to. That is the essential advantage in company – it is pretty difficult to
being in a location like this.” Intellectual property in new markets hide a big tractor factory.”
Is there a special threat to companies’
A European industrial products and intellectual property (IP) in emerging When asked in KPMG’s Global
automotive group concurs, saying “it is markets? Some companies believe so: Manufacturing Benchmark Survey
not really fair just to focus on cost – “I think there is an issue with intellectual about overall new market risks, supply
you have to look at flexibility. When property rights in China, and also in the chain management, transport and
it comes to low-cost countries’ labor Czech Republic and in Poland,” says quality assurance were assigned
cost increases, you have to factor in one European automotive components more importance than IP by the full
the greater impact of productivity manufacturer. Such concerns are sample of surveyed companies. Those
improvements in those countries, shared globally. A Korean automotive companies that did identify intellectual
that outweigh direct-cost increases. manufacturer also comments “there is property as challenging, considered
Plus you have more labor flexibility no question, we are concerned about that understanding intellectual property
and often a superior work ethic”. intellectual property when it comes to protection and formulating intellectual
outsourcing manufacturing. That is property protection were the leading
However, in interviews some why manufacturing that is critical from challenges.
companies caution that localized a business point of view is kept
skills shortages will continue to in-house. And when we go overseas
inhibit investment in certain large to manufacture, we go with someone
emerging economies: one large U.S. that we know”.
headquartered global automotive
manufacturer comments that
localized skill shortages in Russia
remain so acute that some large plant
2 Skills Shortages and Training in Russian Enterprises, World Bank May 2007.
9. New Markets: cost, insight and opportunity 7
KPMG comment
Intellectual property protection In Asia there is not necessarily the The combination of public lobbying,
remains unfinished business same transparency, and everyone private enforcement actions, and
Companies that participated in our feels that they have a right to profit. incentive-based management of
Global Manufacturing Benchmark It is true that there are many cases IP-sensitive relationships can ameliorate
Survey did not assign intellectual where companies do not understand risks to intellectual property for
property (IP) a very large weighting the terms of contracts, but there manufacturers. As emerging economies
relative to other concerns. However, are also many cases of intentional become more mature, they are drawn
companies should be aware that public misreporting. into the global business network and
policy lobbying as well as IP protection respect for law and intellectual property
strategy remain important issues for But while many companies do tends to improve. But companies have
companies with global manufacturing achieve a measure of IP protection to remember that it is up to them
operations. by pro-actively pursuing infringements to ensure that respect for IP makes
of their property rights, public policy business sense to their partners.
Companies extending operations lobbying is also valuable. This is not
into new markets still need to ask just an issue for the courts, it is a broad
themselves whether it is reasonable governance issue. If companies do not
for them to expect their intellectual all tackle the acceptance of IP violations,
property rights to be respected. IP then business may just degenerate
issues are becoming more important into a free-for-all, where only the ‘fast
as supply chains have become more followers’ are rewarded.
globalized. Companies should be
seeking global consistency on IP, Companies can also work to reduce
and it does not appear they are IP risks by building rewards for
there yet. IP compliance into contracts with
manufacturing partners. There is
Companies concerned about IP risks already a recognition in Asia that lack
cite China and some eastern European of transparency can be an obstacle
locations as new markets where risks in developing business relationships.
are highest. Businesses entering Asian Some companies grade their suppliers
markets should be aware of a higher on issues like transparency, and
level of IP risk, especially when it suppliers are aware of this.
comes to manufacturing outsourcing.
10. 8 New Markets: cost, insight and opportunity
New Markets: managing operations Companies were asked: which are the biggest risks
QB4
Companies surveyed agree: the or challenges in low-cost country sourcing?
quality of management of new
market operations is critical. “Low 100%
cost country manufacturing has to be 90%
hands-on,” says a U.S. automotive 80%
components maker. “The difficult part 70%
60%
of it is not running the manufacturing,
50%
it is establishing and maintaining the 40%
relationship. But if you don’t do it 30%
yourself and rely on a third party, you 20%
are likely to fail. You have to be there, 10%
you have to know people by name –
0%
Intellectual
property
Labor cost
Material costs
Warehousing/
infrastructure
General and
administrative
Tax benefits
Transport
Customer
responsiveness
Supply chain
management
Quality
assurance
Other
it is the only way to make it work.”
Some executives interviewed
for the Global Manufacturing
Benchmark Survey commented that
underestimation of the management Source: KPMG International 2008
challenges of successful low-cost
country operations is common,
Companies may also underestimate However, the same companies agree
especially in China. For example, a
customer risk when manufacturing that the risks and challenges of long-
Korean auto components maker says
for local customers. “The challenge in term investment in new markets, and
“some people think you can just move
China is not to do with manpower,” especially in China, are justified by the
to China and make the same stuff
says a European industrial products potential returns. “You may not be
cheaper, but unfortunately that is not
group. “It is customer risk – able to get the results you want today
how it works. It actually takes a huge
establishing what customers want to in China,” says the CFO of one U.S.
commitment to develop a capacity for
buy and then actually being able to industrial and construction machinery
quality in a location like that. This is
deliver it. The customer may place an maker. “But the point of being there
something that creates a lot of tension
order in good faith, but when it comes is this: whoever wins in China in the
in a lot of companies”.
to shipping it they may suddenly not next five years will win in the next
have the money – often because of 100 years.”
some government policy change.
It is not a question of how you
manufacture, it is all a question of
how you serve the market.”
12. 10 New Markets: cost, insight and opportunity
New Markets: Companies were asked: how do
investment approaches you plan to enter new countries?
Results show that most companies
in the survey sample prefer wholly- 100%
owned investment approaches to 90%
joint ventures or entering through 80%
third parties. 70%
60%
These results were confirmed in 50%
detailed interviews. “My personal 40%
QC7
view of joint ventures is that I dislike 30%
them,” says a European automotive 20%
components group. “The agreement 10%
process takes far too long. You have 0%
Joint venture
Wholly owned
operation –
acquisition
Wholly owned
operation –
green field
Through a
third party
to make compromises. And often
enough the outcome is not what you
expect or need, especially in terms of
product quality.” And this company
adds that quality problems go beyond
the product itself: “with joint ventures Source: KPMG International 2008
there are likely to be problems with
the quality of the whole process. One
hundred percent ownership is better Companies were asked: what are the main QA10 TAX SAV
in itself, but that takes more time and benefits of participating in joint ventures?
more cash”.
100%
Other reservations about joint venture 90%
approaches included the reduced 80% High performers
potential for rapid expansion of the 70%
business, or rapid exit from the market. 60%
“The issue is not cost, the issue is 50%
people and control,” says an east 40%
Asian automotive components maker. 30%
“Without full ownership it is really just 20%
too much of a headache when the day 10%
comes when you want to do some 0%
Understanding
of local practice
Market access
Reduced costs
Learn from
local partner
Other
Regulatory
requirements
Sharing
Increased
speed
technology
major expansion.”
When asked what are the main
benefits of a joint-venture approach in
new markets, those companies that
Source: KPMG International 2008
did favor this approach cited market
access and learning from the joint
venture partner over increased speed
of operation, dealing with regulatory
requirements, or the opportunity to
share technology.
13. New Markets: cost, insight and opportunity 11
KPMG comment
The return of the joint venture? Data from Thomson Financial shows
The majority of companies interviewed that the recent increase in joint
or surveyed for this report say they ventures is not just a result of greater
prefer not to engage in joint ventures: cross-border activity overall. When
they consider that joint ventures taken in conjunction with the number
have a higher risk of failure than of strategic alliance deals announced,
either acquisition or wholly owned the total of joint venture and strategic
investment. Yet experience suggests alliance activity has been reasonably
that the relative advantages of a joint- flat for six years, hovering between
venture approach may be increasing. 4,000 and 5,000 deals. In the latter
three years though, joint ventures have
The joint-venture approach to new been steadily gaining on their strategic
market expansion has suffered a marked alliance counterparts and now account
decline in popularity over the last six for 36 percent of the total, as opposed
years, but nevertheless it has remained to the low point of 19 percent in 2004.
an important part of the strategic
armoury. The number of such deals In terms of their involvement with joint
peaked in 2000 at the height of the venture and strategic alliance deals,
dotcom boom, with 3,391 global joint the U.S., Japan, U.K., Canada, China,
ventures announced. By 2004 the figure Australia, India, Germany, France and
had fallen to 810, but thereafter the total Hong Kong have been the top 10 most
began to rise once more. By 2007 the active countries over an eight-year
total had risen to 1,759 deals in the year.1 period. Japan dropped out of the top
five for the first time in 2007, while
The low cost of capital during this Russia has seen the biggest increase
period was one factor behind the in joint venture formation in recent
relative decline of the joint venture. times, breaking into the top 15 for the
Companies were able to raise the first time in 2006. The U.S. remains the
finance for takeovers and greenfield single biggest participant in the joint
investments without difficulty. venture market, responsible for 404
joint ventures in 2007 alone.
However, low-cost capital alone cannot
explain the joint venture trend. Debt
remained freely available during the last
three years, yet the total of announced
joint ventures rose in the three years
from 2005.
1 Thomson Financial, 2008.
14. 12 New Markets: cost, insight and opportunity
These figures suggest that companies goals, the joint venture means that
are increasingly choosing joint ventures a company may avoid having to
out of both necessity and choice. obtain debt financing for, say, general
That is because joint ventures offer goodwill – or the takeover premium
certain advantages in themselves, which may have been required if
a well as in the context of current it went for an outright acquisition.
financial conditions. In the absence of cheap debt, the
potential benefits should be clear.
• Financial conditions are tighter.
Access to cheap debt may have This year-on-year increase in announced
been removed for now, but the global joint ventures is likely to
vocal demands from activist continue in 2008. Despite everything
investors to realize or release happening in the world economy,
shareholder value have not growth opportunities still remain –
gone away. As more proposed especially in the emerging markets – yet
transactions collapse due to an companies risk missing out. In times of
inability to raise mezzanine and falling corporate debt issuance, a joint
senior takeover debt, then the smart venture can be very powerful in quickly
money should be on a significant achieving exposure to new technologies
increase in joint venture activity. and products, distribution channels and
markets – and all with limited capital
• Joint ventures are relatively
investment. The joint venture may
simple, and relatively cheap.
suddenly find itself back in vogue.
Many joint ventures involve matching
existing assets and corporate
networks – they do not have to be
built (as in the case of a greenfield
investment) or reconciled (as in
the case of an outright acquisition).
Assets, market know-how and
market access are pooled, and there
may be no cash component at all.
As well as securing strategic market
15. New Markets: cost, insight and opportunity 13
New Markets: tax planning One of the largest Indian automotive
In interviews, many companies component makers agrees. “Frankly
appeared unaware of the risk dimension we believe you can’t do much through
of global tax compliance, and also tax planning,” says the CFO. “Even
appeared unfamiliar with the concept within India there are hardly any tax
of structured tax planning. incentives left. And if I need to spend
money on a new investment, I will do
A common comment was that in it – those kinds of decisions are never
industrial manufacturing, client driven by tax.”
demands dictated location – so
opportunities for tax planning
were limited.
For example, a European diversified
industrial products maker comments
“you may be able to get a lower tax
rate, but that might be negative in
other ways. If you start to make your
business dependent on tax decisions
you will start to go wrong. You see a
lot of companies that concentrate on
financial restructuring and then start to
lose focus on operations. And the tax
advantages you may get are marginal”.
17. New Markets: cost, insight and opportunity 15
One exception was an east Asian Yet where companies do engage in
automotive component maker: the formal tax planning projects, they say
CFO of this company says “before the benefits are great. A European auto
I came to this company nobody had components group with operations in
heard of tax planning. But now I am Europe’s emerging markets says that it
starting a process that looks at what began a tax planning review to address
structural tax planning opportunities uneven profitability and uneven tax
we have – in terms of structuring liabilities across the group. The CFO
legal entities, reorganizing our inter of the company says “we went into
company transactions and dealing an overall tax review process to tackle
with our intellectual property. All of this with the help of tax advisors –
these factors give opportunities to and we think we have solved it in a
generate tax savings and increase our way that will be acceptable to the tax
net income. Cash is also important: you authorities. If we had to do this all over
have to make sure you don’t end up again, we would do it more quickly; and
with cash that is trapped in a certain we would do it earlier”.
location for tax reasons. It is not so
much a matter of relocating operations
but relocating activities, such as
purchasing”.
18. 16 New Markets: cost, insight and opportunity
Many companies comment that tax To gauge the importance companies
planning seldom influences location attach to tax planning they were asked
decisions directly, not least because tax in survey questions whether they were
breaks associated with direct inward achieving their optimal effective tax
investment have all but disappeared. rate – and if not, whether they had
For example, a south Asian industrial specific plans in place to remedy this.
products manufacturer says that
“there are no specific tax advantages
in manufacturing in China for us. You
might get certain duty free advantages,
but those are eroding rapidly – both in
terms of currency and in terms of the
scaling back of the duty and incentives.
The party is over there”. The company
adds, that in emerging markets – as in
all markets – companies are concerned
more with sourcing efficiency than
they are with tax barriers. “Tax is just Companies were asked: are you currently
an overlay of the complexity of the achieving your optimal effective tax rate,
market,” says the company. “Today and if not do you have plans in place to
it is possible to import anything and remedy this?
everything into India. That means that
sourcing efficiency has become not
only possible, but also a vital element.” Achieving your No
optimal effective Yes
tax rate Don’t know
No
Do you have Yes
plans in place?
Don’t know
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: KPMG International 2008
19. New Markets: cost, insight and opportunity 17
KPMG comment
Manufacturers should revisit – according to a survey conducted operations imply different levels
tax planning by KPMG in the U.K., compliance of risk, and thus different levels of
Companies participating in the KPMG and reporting activities continue to profitability – and that makes tax
Global Manufacturing Benchmark dominate the tax department’s time planning important.
Survey were divided as to the benefits – nearly 60 percent, while only 11
of tax planning in manufacturing. Some percent is spent providing tax input • A global approach can confer
held that tax planning offered extensive into business decisions2. A survey advantage. Consistency and
benefits to manufacturers with globally- conducted by KPMG in the U.S. found stability are important in effective
distributed operations and profit levels, similar results: “The tax department tax planning. First, that’s because
but others believed that allowing will spend most of its time on you are unlikely to get the best
manufacturing strategy to be driven accurate, timely financial reporting and returns if you are constantly chopping
by tax concerns was a mistake. compliance versus effective tax rate/ and changing on the fundamental
cash tax savings”.3 issue of what is driving your profits.
We believe that the latter view is Secondly, because tax authorities
based on a misapprehension. In the What determines successful tax can often take comfort in a globally
manufacturing business, tax directly planning can vary between companies, consistent approach.
or indirectly, is a pertinent factor in but some themes emerge consistently,
many aspects of the business that tax KPMG member firms can find: Effective tax planning can also
planning should be part of the strategy influence a manufacturer’s standing
process. While it would be quite wrong • Tax planning should embrace with investors and cost of capital.
to let tax purposes dictate the location all potential tax issues. Heads of Financial analysts are extremely
of a major manufacturing plant, it is tax do not appear to be sufficiently interested in the after-tax returns your
also wrong to exclude the tax function aware of all the dimensions of tax. strategy is getting. Companies that
from the manufacturing strategy. They tend to be primarily concerned don’t have a tax planning dimension to
with managing corporation tax. But their manufacturing strategy are more
Tax planning is not about locating for do they understand the full impact likely to be rated down.
tax purposes, but rather about seeking of sales taxes, do they understand
to manage the effects of tax rates. customs issues? It should all be
Many companies in the survey say they brought into the strategic process.
want to achieve their optimal effective
tax rate: KPMG member firms can • Tax can be a tool for mapping
find that they cannot effectively do functions and risks. Manufacturing
that unless the head of tax is closely is a very wide term, embracing all
involved in commercial decisions and kinds of activities. It may be fully- 2 The Tax Function – Facing up to the Changing
in the formation of strategy. Many fledged manufacturing; it may be World. KPMG in the U.K., 2006.
heads of tax will tell you that their job contract manufacturing; it may be toll 3 Six Highlights of the Tax Function for 2008.
is to manage the tax rate – however or ‘screwdriver’ operations. All these KPMG 2008 Tax Department Survey. KPMG in
the U.S., 2008.
21. New Markets: cost, insight and opportunity 19
Conclusion
The globalization of manufacturing has Joint venture approaches to new market Although current conditions impose
been one of the great transformational manufacturing have largely given way higher investment costs on companies,
trends of the last quarter century. to wholly owned subsidiary approaches, coupled with the likelihood of
KPMG’s Global Manufacturing a change that is symptomatic of an somewhat slower growth in global
Benchmark Survey seeks to gauge expansion phase in global operations demand, the fundamental drivers of
both the present progress and future (companies report that joint ventures globalization of manufacturing remain
direction of this trend. can be typically difficult to expand in place. Manufacturers report a
rapidly). However, higher cost of capital continued need to cut costs year on
The survey finds that expansion into is likely to dictate some revival of the year, and a continued expectation
new markets is reaching a mature joint-venture approach. that most of the growth in their
phase. Manufacturers are now businesses will come from fast-
primarily concerned with consolidating The survey also reveals other limiting growing new markets. The question
their existing market presences – factors. While approaches to new for many manufacturers participating
winning new customers and new market manufacturing structures in the KPMG Global Manufacturing
business – rather than on further new and management have evolved fast, Benchmark Survey is not whether
market entry. KPMG International concerns over intellectual property they will continue to globalize their
believes this reflects the fact that for vulnerabilities remain. Many companies manufacturing operations, but how
many of the companies interviewed report continued caution over their profitably they can do so.
entry into the most important emerging intellectual property exposure in
growth markets has already been markets lacking a strong tradition of
achieved. Maturity is also evident in intellectual property protection, and this
the increasingly sophisticated view factor is likely to limit the value achieved
that companies take of new market in new market manufacturing. KPMG
opportunities. Low direct costs are no International also finds that a strategic
longer the most important component understanding of the tax implications
of the new market strategy: rather and opportunities of increasingly
companies are concerned with the globalized manufacturing operations
longer-term management challenges remains limited, and it seems likely that
of finding and retaining skills, and the elimination of many direct national
optimizing productivity and flexibility. tax subsidies has led companies
The structure of global manufacturing to underestimate the continuing
operations has also changed rapidly. opportunities in tax planning.