Large global manufacturers are setting their sights on top-line growth over the next two years, focusing on new products, strategic acquisitions and alliances, innovation and increasing production capacity in high-growth markets. Bolstering the growth agenda, are stronger investments in supply chain risk management to mitigate the impact of continued market volatility, according to KPMG’s 2011 Global Manufacturing Outlook.
The annual KPMG survey* of 220 manufacturing executives from global companies with at least US$1 billion in revenue shows that top-line growth has edged out cost as the main priority with almost 80 percent of respondents cautiously optimistic over prospects for growth in the next 12 to 24 months.
When asked to compare the primary focus areas of their growth strategies in the next two years with the two previous years, the survey revealed a marked shift in focus: 56 percent of manufacturers globally are planning to sell new products in new and existing markets over the next two years – up from 37 percent.
The US ranks as the top market for expected increases in demand, closely followed by China, then India, with Brazil and Germany rounding out the top five. Slightly more than half of respondents see emerging markets as key to their growth strategies.
Price volatility of raw materials and inputs – sometimes dramatic – remains the biggest challenge for 44 percent of executives, followed by increased competition and pricing pressure and uncertain demand. This issue of volatility was seen as even more severe among Asian manufacturers at 54 percent. In the US, competition and pricing pressures were the main concerns.
“Recent economic events in Europe and the US may have likely clouded manufacturers’ optimism somewhat. However, the lessons learned from the economic uncertainty, political instability and historic natural disasters of the past few years have taught companies they can survive these challenges with lean agile operating structures, enhanced risk management practices and a focus on innovation,” said Jeff Dobbs, KPMG’s Global Head of Diversified Industrials. “Today we’re seeing that despite an increasing set of cost challenges, manufacturers are realigning their business models to prioritise top-line growth.”
“In South Africa, the priorities are somewhat different with cost challenges being the most important,” said Gavin Maile, KPMG Africa Head of Diversified Industrials. “With recent strike action linked to demands for salary increases above inflation, increases in the price of electricity and other infrastructure tolls and the slowdown in manufacturing output, this has put severe pressure on companies’ margins.”
In pressing ahead on the growth track despite market turmoil, 39 percent of respondents say they will grow through mergers and acquisitions, joint ventures and alliances and 30 percent through increased production capacity, mainly in high-growth markets.
“Many companies emerged from the 2008-10 downturn with significantly reduced cost structures, more cash and liquidity and a laser focus on their customers and markets. These ‘survivors’ have the mindset and strategy to define the standard of success in the next five years,” Dobbs said.
Maile adds, “Many companies are being targeted locally in order for foreign multinationals to gain a footprint in Africa, which is seen as a continent which will continue to see GDP growth ahead of the developed economies.”
To manage volatility better, 56 percent of manufacturers say they are reshaping their supply chain models. Standardisation is one of the key strategies – 55 percent of manufacturers plan to standardise their production process while 45 percent will require standardised inputs. In addition, just over 40 percent said they will focus on cost reduction through a shortening of the overall product development life cycle.
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.
Monitoring where manufacturers are sourcing key components in this year’s survey shows that China remains the leading sourcing destination, with the US second, followed by India, the UK and Brazil.
South Africa’s manufacturing output (which makes up about 16 percent of the country’s GDP) declined during the second quarter of 2011 in line with a drop in business confidence. “There is an urgent need to reverse this trend as significant growth in the manufacturing sector can assist with lowering the very high unemployment levels. Interest rates are expected to remain relatively low but the strong Rand continues to negatively impact exports,” Maile says.
KPMG International commissioned the Economist Intelligence Unit to survey 220 senior manufacturing executives responsible for, or significantly involved in, finance, supply chain, procurement or strategic development. Respondents represent the aerospace and defence, 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 organisations 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 between Western Europe (31 percent), North America (30 percent) and Asia-Pacific (25 percent), with the remainder coming from the rest of the world.
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through its global network of more than 650 analysts and contributors, the Economist Intelligence Unit continuously assesses and forecasts political, economic and business conditions in more than 200 countries. As the world's leading provider of country intelligence, it helps executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.