China is the top sourcing destination for global manufacturing companies outside of their home country, as they increasingly move to maintain their R&D units closer to their production base, according to a recent global manufacturing survey by KPMG.
The report, titled Competitive Advantage: Enhancing Supply Chain Networks for Efficiency and Innovation, surveyed 335 senior executives across five industries – aerospace and defense, automotive, conglomerates, engineering and industrial products, and metals.
The report finds that many global manufacturers are looking to source closer to home, as well as keep their R&D units closer to their production base. A majority (59 percent to 89 percent) of respondents from the five largest economies (China, the US, Japan, Germany and the UK) where the respondents are based, say they expect to increase sourcing from their home country over the next two years. In the case of Japan, Germany and the UK, China is their top sourcing choice after their home country; while for the US, Canada is the top choice, followed by China and the UK in joint second place.
Respondents also indicated that investment in R&D is essential for growth: 42 percent expect to invest four percent or more of revenue in R&D and innovation over the next 24 months which is 15 percentage points higher than the level being invested currently, according to the findings. Sixty-eight percent of respondents say their R&D will largely be incremental innovation, with a focus on enhancing existing product lines and services, while 31 percent plan to invest in breakthrough innovation.
Alex Shum, Partner, KPMG China, says: “China continues to be a magnet for global manufacturing companies, as it remains the fastest growing economy in the world and one of the most attractive investment destinations globally in many industry sectors, if not all.”
“Under the 12th Five-Year Plan, the Chinese government’s policies remain on course in terms of favoring investments in high-end equipment manufacturing, high-tech, energy-efficient products and new materials sectors, as part of measures to upgrade the manufacturing industries, move up the value chain and protect the environment. This helps divert overseas and domestic investments and attract managerial and R&D talents to these sectors. In this regard, we have seen more Chinese companies recruiting overseas talents for key management positions.”
For MNCs which are looking to locate manufacturing plants outside their home countries, they select their R&D locations based on a number of factors. Established markets typically offer more financing options and better IP enforcement than most emerging economies, but other considerations include a favorable business operating environment, availability of skilled talent, and lowest overall total cost, the report notes.
“Taking all of these factors into account and combining them with longer-term, growth-market demographics, China and India are prime destinations for increased investment,” Shum adds.
On the growth front, a third of all companies, and 47 percent of larger companies (Over US$5 billion in revenue), are looking to mergers and acquisitions; 44 percent say they will invest in Greenfield opportunities in growth markets.
In addition, respondents said they are increasingly placing the supply chain at the centre of their strategies to innovate. Many are starting to see their suppliers as a source, not just of production and logistics, but also of ideas. Half of the survey respondents say that partnerships, rather than in-house efforts, will characterize the future of innovation.
Shum concludes: “Innovation and R&D strategies remain critical to staying ahead of the game and manufacturing companies are increasingly placing their partner network at the center of their strategies to generate fresh ideas. Half of our respondents say that their firms will rely on partners for innovation. Communication with key supply chain innovation partners will be vital in order to drive the necessary product enhancements with the speed, quality and cost the market is demanding.”
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