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Global manufacturers shift strategies to seek growth and profits


By Sabine Vollmer

Emerging markets are no longer the lure they used to be for global manufacturers. To drive growth and increase profitability, more companies are instead focusing on developed markets and internal operations.

In the past year, the US, Germany, and the UK gained the most in importance for manufacturing companies’ growth prospects, according to a 2014 PwC survey of about 1,300 CEOs worldwide. China remained the most important country, but its attractiveness as a growth booster increased less than that of the three developed markets. Brazil and India lost lustre.

At the same time, manufacturers considered investing more in product innovation; system and process upgrades to measure costs and profitability; and work on the supply chain, a survey for KPMG found.

The shifting priorities reflect the acceleration of three trends, CEOs said in the PwC survey:

  • Technological advances such as the digital economy, social media, mobile devices, and Big Data.
  • Slow or no population growth in developed economies redistributing the world’s workforce in favour of younger, emerging economies.
  • Changes in economic power as incomes in emerging economies rise.

“Where people live and work, how they live and work, the social and political context in which they live and work – everything is in flux,” the PwC report said.

The effects are particularly apparent in how manufacturers worldwide are reshaping internal operations, the KPMG report found.

“Given the ongoing shifts that we continue to see in product lines, technology, and supply chains, it’s not surprising that organizations are prioritizing a wide variety of analytics and data-driven investments in an attempt to get a better handle on their costs and profits,” Jim Scalise, a KPMG partner in management consulting, said in the report.

Rediscovering developed markets

In 2011, CEOs of manufacturing companies were bullish about emerging markets. CEOs from around the world overwhelmingly expected their companies’ key operations in Asia, Africa, and Latin America to grow over the coming year. Ninety-four per cent of North American CEOs, for example, were optimistic about revenue growth in Asian markets.

And, at the time, CEOs were a lot less optimistic about key operations in North America and Western Europe, where economies were still reeling from the effects of the financial crisis. Only about half of North American and Western European CEOs expected to see growth at key operations in Western Europe, and their expectations were only slightly better for key operations in North America.

Three years later, as growth in Brazil, Russia, India, China, South Africa, and other emerging markets has slowed, CEOs worldwide are focusing again on some advanced economies for growth.

In 2014, one-third still considered China among the three most important countries for their company’s growth prospects, up from 31% last year. The US came in second with 30%, up from 23%; Germany followed in third with 17%, up from 12%; and the UK was in fourth with 10%, up from 7%.

Brazil and India dropped by three percentage points to 12% and 7%, respectively, this year. Indonesia (7%), Russia (7%), and Mexico (5%) each were named prospective growth boosters as often as they were last year.

Innovation as growth driver

To better harness technological advances and serve increasingly demanding consumers, including in emerging markets, more global manufacturers are embracing research and development of breakthrough products and new, more collaborative business models to pay for innovation, according to KPMG and PwC.

Seventy per cent of manufacturers polled in the KPMG survey wanted to spend 2% to 3% of their revenue on R&D over the next two years, up from the 43% that increased their R&D spending by that much in the past two years. Eleven per cent even wanted to boost R&D spending by 4% to 5% over the next two years.

Companies with less than $5 billion in annual revenues expressed a particular willingness to increase their R&D budgets.

Thirty-six per cent of respondents in 2014 said their companies were primarily interested in breakthrough new products, up from 31% a year ago.

In nearly half of the manufacturers involved in the KPMG survey, the desire for more innovation outstripped funding. But most said they would look for new ways to overcome funding challenges.
 
Eighty-eight per cent of respondents said they see partnerships as a way forward, up from 51% in 2013. And 68% of companies said they would adopt more collaborative business models with suppliers and competitors.

Building a better supply chain

Supply chains continue to challenge manufacturers worldwide. In the KPMG survey, 40% said they lack information and visibility across their extended supply chain; 38% run into problems with risk, reliability, and quality of supplier performance; and 36% said they have IT systems that are inadequate for supply-chain visibility, planning, and execution.

But in the past year, manufacturers have considerably improved how fast they can assess the impact of an unexpected disruption in their supply chains. Sixty-three per cent need less than a week, up from 45% last year.

With better risk management in hand, companies are now turning their attention to better cost management in the supply chain. Indeed, 72% of US companies and 68% of UK companies are paying close attention to cost management.

Companies are also adopting more technology to improve visibility and integration of their supply chains. Seventy-four per cent of respondents to the KPMG survey expected to achieve a globally integrated supply chain within the next three to five years.

By far the biggest obstacle to more use of technology is the lack of mature technology, which half of all respondents pointed out.

“Already, we are seeing massive benefits come from new technologies,” Bruce Rogers at Forbes Insights said in the KPMG report. “Those that are able to create a common stream of information, a common language, and a common view of the business will see more than just incremental increases in business efficiency – they will also enjoy massive competitive advantages.”

Related CGMA Magazine content:

Manufacturing’s Future Includes Localised Supply Chains, Talent Shortages”: Manufacturers face operational and recruiting challenges that are leading to localised supply chains, investment in energy-efficient processes, and new-worker training initiatives.

Manufacturers Expect Innovation, Collaboration to Drive Sustained Growth”: Manufacturers are optimistic that they can combine product and process innovation with customer and supplier collaboration to create sustained but modest growth in an uncertain world economy.

Three Ways to Obtain Meaningful Data That Support Quick Decisions”: Manufacturers often aren’t prepared to take advantage of available data to quickly implement good, quick decisions. Antiquated systems often are a barrier to efficiency. Three key considerations can accelerate savvy decision-making.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.

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