They’re bolstering growth agendas with stronger investments in supply chain risk management to mitigate the impact of continued market volatility, reveals the report (available at www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/global-manufacturing-outlook/Pages/default.aspx).
This annual survey—which included 220 manufacturing executives from global companies with at least US$1 billion in revenue—shows that businesses consider top-line growth a priority for the next two years. Other focus areas include research and development (R&D), customer relationships and cost containment. Almost 80 percent of respondents are cautiously optimistic about growth prospects during this two-year period.
For this survey, participating manufacturers were asked to compare primary focus areas of growth strategies in the next two years with those of the previous two years. Responses indicated a substantial shift: 56 percent plan to sell new products in new and existing markets over the next two years (up from 37 percent).
Slightly more than half of manufacturers questioned see emerging markets as key to their growth strategies. Looking at the top five markets for expected increase in demand, the United States ranks number one, followed closely by China and then India, Brazil and Germany.
Price volatility of raw materials and inputs remains the biggest challenge, indicate 44 percent of executives. Other challenges include increased competition, pricing pressure and uncertain demand. The volatility issue was perceived as even more severe among Asian manufacturers, at 54 percent. In the United States, competition and pricing ranked as the chief concerns.
“Recent economic events in Europe and the United States may have likely clouded manufacturers’ optimism somewhat,” comments Jeff Dobbs, KPMG’s global head of diversified industrials and a partner in the US Firm. “However, lessons learned from the economic uncertainty, political instability, and historic natural disasters witnessed in the past few years have taught companies that they can survive challenges with lean and agile operating structures, enhanced risk management practices, and a focus on innovation. Despite an increasing set of cost challenges, manufacturers are realigning their business models to prioritize top-line growth.”
Path Forward: Acquisitions, Investment, Innovation
Manufacturers intend to press ahead on the growth track, despite market turmoil. Thirty-nine percent of respondents say they will grow through mergers and acquisitions, joint ventures and alliances; and 30 percent look to increase production capacity, mainly in high-growth markets.
For 35 percent of respondents, investment in R&D and innovation is a big priority (a close second to the ever-present priority of cost management). Indeed, innovation is a renewed focus, and respondents moving in this direction said they will open design centers in high-growth markets.
“Many companies emerged from the [economic downturn] with significantly reduced cost structures, more cash and liquidity, and a laser focus on their customers and markets,” observes Dobbs. “These ‘survivors’ have the mindset and strategy to define the standard of success in the next five years.”
Grooming Supply Chains for Growth
To better manage volatility, 56 percent of manufacturers are reshaping their supply chain models. For them, standardization is a key strategy. Fifty-five percent of manufacturers plan to standardize their production process while 45 percent will require standardized inputs. Further, just over 40 percent said they will focus on cost reduction through a shortening of the overall product development life cycle.
“Companies are still closely watching cash expenditures, and while there is more emphasis now on growth than two years ago, many are developing approaches to more tightly scrutinize new product development expenditures and expected ROI,” says Doug Gates, principal, Advisory, Business Effectiveness, KPMG in the US. “We’re also seeing an increased focus now on the development of global design standards, process and systems to provide greater design flexibility.”
Nearly half of respondents say they will invest in technology to improve visibility across the supply chain, the single most important tool for managing risk. Other measures include helping suppliers develop risk management standards and assessing supply chain processes.
“Scenario building has become a real cornerstone of planning, something that has taken off over the last 12 to 18 months,” says Eric Damotte, head of KPMG’s Global Metals practice and a partner with KPMG in Spain. “Clients realize they need to plot a range of variables, both quantitative and qualitative, and plan contingencies accordingly.”
On the need for greater scrutiny and supply chain process, Gerhard Dauner, KPMG head of Diversified Industrials for and a partner in the German firm, observes, “We talk about business intelligence but the challenge is turning that into strategic and operational planning intelligence in order to tease out emerging megatrends and position the organization to respond on a regional basis.”
This year’s survey monitored where manufacturers are sourcing key components and revealed that China remains the leading sourcing destination. The United States comes in second, followed by India, the UK and Brazil. While China reigns, manufacturers looking to source in other countries in Southeast Asia must be aware of the differences in various partnership models across the region, warns Andy Williams, head of KPMG’s Diversified Industrials for Asia Pacific and a partner with KPMG in (RC) Singapore. “A mistake that foreign entities make when expanding into Asia is to assume that the outsourcing model they follow in other parts of the world will work here,” he says. “Asia-Pacific hosts a tremendous mix of cultures under one regional moniker. For that reason, manufacturers cannot apply the same solutions unilaterally whether it be globally or even within the region itself.”
Survey Take-Home Points
The survey revealed regional highlights. In the Asia Pacific:
- Eighty percent of respondents from the region were either very optimistic or reasonably confident about their company’s business outlook over the next two years
- The top three challenges for the region over the same period were price volatility on key cost inputs, uncertain demand, and intense competition and price pressure
- For new business growth in the next two years, companies in this region will first look to China, followed by India and then the US
- The majority will focus on achieving growth through new products in new and existing markets.
- The overwhelming majority will seek sourcing within the region followed by the US over the next two years.
In Europe, the Middle East and Africa:
- Seventy-three percent of respondents from the region were either very optimistic or optimistic about their company’s business outlook over the next two years
- Price volatility on key cost inputs, and intense competition and pressure on prices uncertain demand were seen as the top three challenges over the next two years
- Growth for companies in this region over the next two years will come from a focus on both new and existing products in new and existing markets.
- The US (1), China (2) and India (3) were cited by most respondents as the countries expected to account for a majority of the growth in the same period
- China, the US and India were selected as the top-ranking sourcing destinations for the same period
In the United States:
- Seventy-nine percent of respondents were either very optimistic or optimistic on their company’s business outlook for the next two years
- Price volatility on key cost inputs, uncertain demand, and intense competition and pressure on pricing were seen as the top three challenges over the next two years
- Growth for a majority of companies in the US over the next two years will come from a focus on both new and existing products in existing markets
- Growth for 60 percent of respondents will come from the US, followed by China and India.
- The US, China and India were also cited by most respondents as the countries where they plan to increase sourcing in the same period
KPMG is a global network of professional firms that provide audit, tax and advisory services. It operates in 150 countries and has 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative, a Swiss entity. KPMG LLP is the US member firm. For more information, visit www.us.kpmg.com.