While manufacturers are confident that renewed growth in their sector is imminent, the highly competitive and volatile business environment renders cost-cutting a necessity. They are ramping up their innovation efforts to improve their offerings in anticipation of extra orders and to make themselves even leaner. Manufacturers’ business models are changing as a result, with value-added services becoming a more important source of revenue and nearshoring yielding numerous benefits. These are the key findings of Global Manufacturing Outlook 2012: Fostering Growth through Innovation.
The global economic recovery is proving to be fraught with false starts, market volatility, and macroeconomic uncertainty. For example, the euro zone debt crisis, which survey respondents rank as the biggest obstacle to global growth, continues to hamper investment as this report goes to press. Yet 75 percent of manufacturers are either optimistic or very optimistic about the outlook for their business over the next 12 to 24 months. They are confident that their own businesses are in a good position to return to healthy levels of growth, even though they cannot be certain that the wider economy will do the same.
The profitable growth agenda
As in previous low-growth environments, manufacturers are trying to find ways to use idle resources and preserve shareholder value. Sixty-two percent of respondents say they are improving the efficiency of their processes, while 47 percent say they are “refocusing the business on its core offerings and capabilities.” These two activities, regarded as the most important by some margin, reflect the second area of strategic focus mentioned above – maintaining lean operations. Indeed, the growth picture is still uncertain enough for 54 percent of respondents to predict that “exiting unprofitable product lines and/or geographies” will become more important over the next 12 to 24 months.
Yet 45 percent of respondents say they are prioritizing top-line growth on a 12 to 24 month horizon – more than double the proportion who said so last year. More strikingly, 47 percent are prioritizing bottom-line growth over the same period. In other words, manufacturers are preparing not just for imminent growth but for high-margin growth. The types of innovation they are conducting and the ways in which they are altering their business models are critical to the success of this two-pronged strategy.
The demand for this high-margin business will come from some predictable places. Forty-three percent of survey respondents worldwide see the US as a key source of demand for top-line growth over the next 12 to 24 months and another 41 percent as a key source of bottom-line growth for their organizations. The next most popular locales are more than 10 percentage points behind. Yet among respondents from emerging markets, the US lead is less pronounced – here it is cited by 38 percent of respondents, followed closely by China (35 percent), India (29 percent), Brazil (19 percent) and Singapore (12 percent).
Cost control vital for bottom-line growth
Forty-four percent of respondents worldwide believe input cost volatility is the biggest challenge facing their business over a 12 to 24 month horizon – the same proportion as in 2011. And this concern is supported by external data. The ISM Prices Index, for example, which gauges cost inputs for US manufacturers, reached 61.5 percent in February 2012, up six percentage points against the previous month. Yet the Economist Intelligence Unit predicts in its Global Outlook Forecasts that the price of industrial raw materials will fall on average by 12.8 percent in 2012 while that of crude oil will rise by 3.6 percent.
With such a mixed picture, it’s not surprising that respondents say “cost management” is the area of their business in which they expect to invest and/or expand most over the coming 12 to 24 months. Manufacturers also say that cost structure is the area of their business model that will be subject to the greatest change over the same period. In addition, respondents do not expect cost pressures to abate over the next 12 to 24 months: less than 10 percent of survey respondents expect decreases in energy and transport costs, and less than 15 percent anticipate decreases in skilled labor and raw materials costs. The remaining respondents are fairly evenly split between flat or increased costs.