According to KPMG’s 2012 Global Manufacturing Outlook: Fostering Growth through Innovation 76 percent of respondents globally are optimistic about their business outlook over the next 12 to 24 months. This optimism seems to be buoying expectations that both sales and profitability will be up during the period, with nearly half of respondents placing both top-line (43 percent) and bottom-line growth (41 percent) as main priorities.
South Africans share this optimism, with a majority of respondents to the Bureau for Economic Research’s first-quarter Manufacturing Survey reporting an improvement in general business conditions relative to a year ago. Producers also made an upward adjustment to expectations regarding business conditions in 12 months’ time.
Of respondents to the KPMG survey, 40 percent expect the US to lead the growth, followed by China, India, Brazil and Germany. “Manufacturers are not just preparing for growth but for ‘high-margin growth’,” said Jeff Dobbs, KPMG Global Head of Diversified Industrials and a Director in the US firm. According to most respondents, price volatility on cost inputs, risk in the supply chain and uncertain demand are ongoing challenges for manufacturers.
“Manufacturers have acclimated to a world where volatility is the norm,” Dobbs added. “Today, manufacturers are leaner and more agile, many with strong balance sheets and healthy cash reserves – in a nutshell, they’re poised for growth.”
According to Gavin Maile, KPMG Africa Industrial, Automotive & Construction Director, “The situation in the manufacturing sector in South Africa differs significantly. Rising input costs (raw materials, electricity and labour) and lower volumes and exports have eroded profitability. Thus many manufacturing companies are battling for survival. The volatility related to exchange rate movements is another factor that needs to be managed, with the recent weakness of the Rand set to benefit manufacturers who export.”
Sixty-two percent of respondents to KPMG’s survey say they are performing process improvements and refocusing on core competencies. Just over 50 percent say they are eliminating unprofitable product lines and markets.
Growth in South Africa’s manufacturing sector, and in the economy as a whole, will only take place provided the country’s planned infrastructure programme is effectively rolled-out. This plan has the potential to boost the economy, resulting in employment growth and further development. Respondents to South Africa’s Manufacturing Circle’s first-quarter Manufacturing Survey expect manufacturing value-add to shrink by about 0.7 percent during 2012.
Greater innovation through collaboration
Clearly, manufacturers are doing more than scaling back. They are also increasing activities in innovation and collaboration, keeping a longer view of a return to sustainable growth. A majority of respondents (72 percent) believe that transformational innovation is either in full swing, or will be so in 12-24 months, with US respondents leading in the view (84 percent) that innovation is or will be well under way.
“After several years of focusing on cutting costs, many manufacturers realise that they have to invest in expanding their product and service offerings in order to remain competitive,” Dobbs commented. Globally, the majority of manufacturers are looking to improve their processes and existing products over the next 12 to 24 months via increased ‘process innovation’ and ‘incremental innovation’, but ‘radical innovation’ and ‘fundamental innovation’ also ranked highly for increased activity.
Manufacturers from emerging markets outpaced those from developed markets by 10 and 14 percentage points, respectively, in their intent to increase radical and fundamental innovation in the next 12 to 24 months. Furthermore, when respondents who planned to increase sourcing activities in China and India in the same period, were asked which types of activities they planned to undertake, more than half chose R&D for China, and more than three-quarters said ‘product development/design’ for India.
Innovation will not happen in isolation, according to the findings, but increasingly in collaborative arrangements over the next 12 to 24 months. Just over 60 percent of respondents globally said they would work more with customers for customised product development, and with suppliers for product design.
“There’s a decisive shift by manufacturers towards collaboration in the earliest stages of product development,” Dobbs said. “This inclusive approach to innovation not only disperses potential risks, costs and rewards across the supply chain, but it also lets manufacturers focus on what they do best by leveraging the expertise of external partners and accelerating speed to market.”
The collaborative environment is also having an impact on manufacturing business models, which are becoming more service-oriented. This may give manufacturers new ways to gain competitive advantage, for example, in the provision of development and maintenance contracts and other collaborative services. Shifts in their value propositions – such as new pricing models – ranked third (49 percent) after cost structure and new sales targets, as the intended changes respondents would make to their business models.
This rise in value-added services is expected to boost profits. Nearly two-thirds of respondents predicted new/enhanced customer services would make a significant or very significant contribution to profits in the next 12 to 24 months.
“In an attempt to buffer down-cycles, manufacturers are expanding their product offerings to include value-added services. While this may add to their profit margins, it should also help them strengthen customer relationships and identify future sales opportunities,” Dobbs said.
*About the report
KPMG’s 2012 Global Manufacturing Outlook: Fostering Growth through Innovation, surveyed 241 senior manufacturing executives in February 2012. Respondents represented the aerospace and defence, metals, engineering and industrial products sectors, including industrial conglomerates. Participants represented companies with more than US$1bn in annual revenue, and 33 percent hail from organisations with more than US$10bn in revenue. The companies were geographically split among Western Europe (29 percent), North America (23 percent), Asia-Pacific (28 percent), Middle East and Africa (10 percent) and Latin America (10 percent).
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 153 countries and have 145 000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.