Global manufacturing outlook growth while managing volatility

Global
Manufacturing
Outlook:

Growth while
Managing Volatility
Global research commissioned
by KPMG International from the
Economist Intelligence Unit


Interviewees
Bob Kickham
Senior Vice President, Procurement,
Luvata
Barbara Kux
Head of Supply Chain Management,
Siemens
Ding Liguo
Chairman, Delong Holdings
Alex Molinaroli
Vice President and President,
Power Solutions, Johnson Controls

Preface
Global Manufacturing Outlook: Growth while Managing
Volatility is a KPMG International report that investigates how large
industrial manufacturers are dealing with market and input volatility
in a global marketplace. The report was written by the Economist
Intelligence Unit, which also executed the online survey and
conducted the interviews on behalf of KPMG International.

We would like to thank all of the executives who participated in the
survey and interviews for their valuable time and insight. The survey
was conducted in June and the interviews in July of 2011, and both
reflect the economic and financial conditions at that time.

Dr. Steve New
Fellow: Management Studies, Oxford
University’s Säid Business School
Martin Richenhagen
Chairman, President and Chief
Executive Officer, AGCO
Henry Yu
Chief Executive Officer, General
Steel Holdings

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


About the survey
A total of 220 senior manufacturing executives participated in the
survey. All respondents are responsible for, or significantly involved
in, finance, supply chain, procurement or strategic development.
Respondents represent the aerospace and defense, 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 organizations
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 among Western Europe (31 percent), North America
(30 percent) and Asia-Pacific (25 percent), with the remainder coming

from the rest of the world.
1. What are your organization’s global annual revenues in
US dollars?

2. Which of the following best describes your title?
0.9%

Board member

0.5%

CEO/President/Managing
director

3.6%

$1bn to $5bn
21.36%

$6bn to $10bn
$11bn to $25bn
48.18%

More than $25bn

18.18%

1.4%

12.7%

CFO/Treasurer/Controller
COO

13.2%

CIO/Technology director
6.4%

15.9%

Other C-level executive
SVP/VP/Director

5.9%

21.8%

Head of business unit
Head of department

17.7%

Manager

12.27%

Other

3. In which region are you personally based?

3.64%

4. What is your primary industry?

0.45%

21.36%

10.00%

Western Europe

30.91%

North America
31.36%

30.00%

Aerospace and defense

Asia-Pacific
Middle East and Africa

24.55%

Latin America
Eastern Europe

Engineering and industrial

products (including
industrial electronics)
Conglomerate
(eg, multi-industry
organization)

22.27%
25.45%

Metals

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Foreword
At the end of 2010 it looked like the long-awaited economic
recovery was finally underway, but a series of global shocks
throughout 2011 have taken the steam out of the positive
momentum, casting doubt on a wider market recovery. Despite
these challenges, Diversified industrial (DI) companies –
accustomed to cyclical swings and continuous volatility – are
clearly preparing themselves for the long haul.
In this year’s Global Manufacturing Outlook survey, growth has
emerged as a predominant theme along with a continuing focus
on cost, risk management and global supply chain resilience.
Today, companies are choosing to pursue growth through both
product innovation and strategic alliances. They are also finetuning product costs with more sophisticated design and process
improvements, positioning production capabilities closer to growth
markets, and enhancing transparency to manage global risk.
To provide context to this year’s survey results, the report contains

a broad range of insights from KPMG partners, industry experts
and innovative DI companies. These experts also weigh in on
what it will take for companies to respond to the challenges and
opportunities of today’s volatile global economy and distance
themselves from the competition.
Despite the prolonged uncertainties DI businesses face, many
companies emerged from the 2008–2010 downturn with
significantly reduced cost structures, more cash and liquidity,
and a laser focus on their customers and markets. In an age and
industry where volatility has become a given, companies that
possess these attributes and pursue these strategies will likely
define the standard of success in the next five years. Our report
results show that DI companies are clearly positioned for growth,
but they are doing so with a healthy respect for unpredictability
and volatility.

Jeff Dobbs

KPMG Global Head of Diversified Industrials

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Content

Executive summary

4

The business outlook:

growth ahead, but risks loom
Growth strategies:
managing volatility
Reworking supply chains
to support growth
Conclusion

6
14

24
33

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Executive summary

Despite a generally profitable year, many leaders of global manufacturing firms face a
number of challenges. Just as the global economy looked like it was gaining momentum,
the Japanese tsunami struck, unravelling many global supply chains. Since then, volatility
has become a key watchword, as a wide array of macroeconomic risks – most notably
the European and US debt crises – raise uncertainty over future demand and the spectre
of a “double dip” recession.
Yet executives at major manufacturers – organizations polled in an Economist
Intelligence Unit survey representing firms with at least US$1 billion in revenue – are
cautiously optimistic that they can realign their businesses toward top-line growth while
managing the multitude of cost challenges.

4

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Some of the key findings emerging from our research include:
• Price volatility is the biggest headache for manufacturers. The number-one
challenge identified for the year ahead is that of price volatility of raw materials and
other inputs. Bob Kickham, senior vice president, procurement, at Luvata – a global
metals and manufacturing group – recounts how a few years back a US$10 shift in
copper prices in one day was an extraordinary occurrence. He is now immune to daily
swings of up to US$250. Selected by 44 percent of firms globally, ahead of any other
issue, price volatility is especially acute for Asian firms, selected by 54 percent of
respondents.
• Although the push toward emerging markets continues, this does not imply the
demise of manufacturing in the West. One of the more striking research findings
is that the US registers second only to China as a destination for new sourcing in the
next 12 to 24 months. It ranks third highest even for emerging market manufacturers.
“We’re going in both directions,” says Martin Richenhagen, CEO of AGCO, a global farm
equipment manufacturer, of his organization’s investment plans in both Asia and North
America. Of course, it is clear that emerging markets are a major driver of growth:
52 percent of manufacturers say their growth plans hinge on these markets. But many
plan to invest in mature markets too: 43 percent of respondents aim to expand capacity
in developed markets, more than twice the proportion that plan cutbacks.
• In the pursuit of growth, manufacturers are prioritizing new products. One
noticeable shift when comparing respondents’ views from the last two years versus
the next two years is the added attention that firms will devote to new products. Over
the next two years those planning to rely on existing products in existing markets will
more than halve (from 44 percent to 19 percent), whereas those planning to sell new

wares in existing and new markets will increase from 37 percent to 56 percent. This
will put a premium on innovation, and the survey shows that organizations are placing
more emphasis on research and development (R&D). Indeed, innovation/R&D will be
the second-highest priority for investment/expansion, after cost management. Many
are opening design centers in high-growth markets. In doing so, however, they will be
challenged by a shortage of skills, the top human resources concern cited by executives
in those markets.
• Diversification into new markets and new products will converge with a push
toward input and process standardization. In response to both input price inflation
and volatility, many organizations are prioritizing increased standardization. More than
half of manufacturers polled (55 percent) plan to standardize production processes
across sites, while nearly half (45 percent) will move toward standardized inputs across
product lines. Given the concomitant shift toward a greater focus on new products,
however, standardization poses a risk of homogenous product lines that could fail to
engage consumers. Another challenge will be managing the tensions that could arise
between Sales and Procurement, as one function tries to push new products into the
market while the other works to standardize inputs.
• Investment in supply chain risk management will continue, with a particular focus
on transparency. Many organizations have already made substantial investments in
bolstering their risk management functions over the past couple of years. Stung by
the severity of the tsunami in Japan, this push will continue, with a particular focus on
improved supply chain visibility, to better assess where potential vulnerabilities lie. The
use of technology to improve supply chain visibility is the number-one tool that executives
plan to rely on to identify risks (selected by 49 percent of respondents).

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

5

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

The business
outlook:
growth ahead, but
risks loom
Many global manufacturers can look
back on a good year. Job growth picked
up against one year ago, while both
industrial output and global trade
were robust. The Institute of Supply
Management’s Purchasing Managers
Index (PMI), a monthly snapshot
of sentiment among procurement
executives, showed that as of
mid-2011, confidence among
manufacturers in the US had risen
consistently for nearly two years.
This confidence was mirrored by
manufacturing executives surveyed by
the Economist Intelligence Unit in June
2011. One in four survey respondents
describe themselves as “very
optimistic” about their organization’s
prospects for the coming one to two
years, while a further 53 percent
are “optimistic.” Luvata, a global
metals and manufacturing group with
revenues of over €3 billion, is one
example. “2009 was a very poor year,

the eye of the recession. But during
2010–11, we’ve doubled our profits and
we expect to be back at 2008 levels by
the end of 2011,” says Bob Kickham,
the firm’s senior vice president for
procurement. “Next year, we see that
trend continuing, with double-digit
increases, while we’re cautiously
optimistic in terms of growth in
profitability.”

But compared with findings
highlighted in the 2010 Global
Manufacturing Outlook1, a degree of
caution has crept in, primarily triggered
by the European and US debt crises
that have dominated the headlines
in mid-2011. Overall, confidence is
slightly down on a year ago. This
matches a similar drop in the PMI (see
chart). European manufacturers are
the most ambivalent about prospects,
while Asian firms are most bullish. US
manufacturers were also optimistic,
perhaps because at the time of the
survey, the full impact of the country’s
debt crisis was not known. Given
the potential of downside risks, such
differences are unsurprising. The rate
of gain in overall economic output

has declined in the US and Europe, as
the global economy lost some of its
momentum. This is filtering through
to manufacturers. Joe Kaeser, the
chief financial officer of Siemens, a
conglomerate with revenues of €76
billion in 2010, recently advised that
increased efforts would be required
to maintain growth going forward,
as “the tailwind from the economic
recovery is likely over.”2
Financial crises in the euro zone have
dimmed Europe’s economic outlook.
Japan is still recovering from the effects
of its devastating March tsunami.

1 Global Manufacturing Outlook: Relationships, Risk and Reach, KPMG International, September 2010
2 Siemens sees end to ‘tailwind of economic recovery’, Financial Times, June 28, 2011

6

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


How optimistic are you about your business outlook in the next
12 to 24 months?

51%

27%

53%

25%

21%
15%
2%

Very
optimistic

Optimistic

Neither
optimistic nor
pessimistic

2010 Survey

6%

1%
Very
pessimistic

Pessimistic

2011 Survey

Source: Economist Intelligence Unit survey, 2011 and 2010.

Purchasing Managers Index: Manufacturing
January 2008–July 2011, a reading above 50 indicates a general expansion; below 50 a general contraction

70
60
50
40
30
20

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Jan-08

0

Apr-08

10

Source: Institute for Supply Management (ISM)

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

7

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


The Baltic Dry Index (BDI), an index
of shipping costs, remains close
to record-low levels. Developed

economies are just starting to
grapple with their debt burdens, with
government austerity ahead.
In emerging markets, the outlook is
more positive, but risks lurk there
too. Inflation remains high while
concerns mount about the overheating
of China’s economy. “The global
steel industry has been volatile in

past months, and is likely to remain
uncertain in coming months,” says
Ding Liguo, chairman of Delong
Holdings, a China-headquartered
steel manufacturing group with
2010 revenues of RMB9.9 billion
(US$1.5 billion). He adds that steel
production in China has been affected
as the country implemented credittightening measures to rein in inflation
and cool its housing market.

KPMG Insight
Integrated Finance Governance

David Frey
KPMG Partner,
Advisory,
KPMG in China

8

Financial management is becoming
more central in managing risk both for
companies operating in Asia and for
Asian companies looking to expand
globally. In both cases managers are
becoming responsible for transactions
and processes that are occurring
thousands of miles away across
multiple locations. To get a handle on
that, I have been advising my clients
to move their target operating model
toward a structure with more integrated
finance governance. For too long
finance has been stuck at headquarters
where managers have been allowed

to see their primary function as saying
“no” to spending requests. Instead,
the most agile organizations are seizing
on finance as a way to bring additional
value in terms of analytics and insight.
As the amount of data and noise
proliferates, finance offers a way to
gain insights and align the underlying
business case. I’m seeing clients move
toward center of excellence models
where finance professionals, skilled
in analytics, valuations, mergers, or
treasury are housed together centrally

where they can serve as a repository
of knowledge for outlying offices. That
has been a very effective way to gain
strategic leverage.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Price pressures
But the most pressing challenge for
manufacturers is the cost of key inputs.
Although prices have eased more
recently, many commodities remain
at historically high levels. Meanwhile,
a jittery global economy has increased
the price volatility of key inputs, such
as metals. This is easily the biggest
headache for manufacturers, selected by
44 percent of respondents globally. One
example is the price of copper, which
increased from US$3,500 per ton in 2005
to over US$9,000 by mid-2011.
Unfortunately, executives do not
anticipate much relief. A majority of
survey respondents expects price
increases on raw materials, energy,

and transport and distribution. Some

could be steep. One in five respondents
expect transport costs to increase by at
least 20 percent in the next one to two
years, while 16 percent think the same
of primary raw materials. However, the
greatest fear of price increases relates
to energy costs with nearly one in four
executives expecting them to rise at
least 20 percent. Such sentiment may
be due to the fact that manufacturers
are in the center of a price storm in
2011: industrial raw materials prices
are expected to rise nearly 30 percent,
according to the Economist Intelligence
Unit, on the back of a 44.5 percent
increase last year (see Growth and price
forecasts). Some relief is forecast for 2012.

In the 25 years prior to 2005, the
average price volatility (for copper)
was minor. It would be a news story
if it moved US$10 in a day. But I am
now immune to seeing swings of
US$250 a day.

Bob Kickham

Senior Vice-President,
Procurement, Luvata

What do you see as the biggest challenges for your business in the next
12 to 24 months?
Percent respondents

44%

Price volatility on key cost inputs

40%

Intense competition and pressure on prices

35%

Uncertain demand
27%

Risk and reliability in the supply chain

24%

Efficiency in R&D/product development process

23%

Increased regulation in our industry

21%

Managing geopolitical risk

Improve technological efficiency

15%

Prospect of tax increases

15%

Lack of access to capital or credit

10%

Source: Economist Intelligence Unit survey, 2011.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

9

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Growth and price forecasts
2010–2015

2010e

2011f

2012f

2013f

2014f

2015f

Real GDP growth (PPP exchange rates)
World

4.9

4.1

4.2

4.3

4.3

4.3

OECD

2.9

2.2

2.3

2.3

2.4

2.5

Non-OECD

7.4

6.5

6.5

6.4

6.5

6.5

Real GDP growth (market exchange rates)
World

3.8

2.9

3.2

3.2

3.1

3.2

North America

2.9

2.4

2.5

2.5

2.5

2.6

Western Europe

2.0

2.1

1.6

1.9

1.7

1.7

Asia & Australasia (including Japan)

6.5

3.8

5.1

4.5

4.4

4.5

94.50

90.00

85.00

83.00

Oil prices: Brent; US$/b

79.63

108.5

Industrial raw materials

44.5

29.1

-7.0

-4.8

-5.9

-3.0

Metals

39.0

21.9

2.8

-5.7

-4.8

-2.0

Fibres

42.2

49.8

-30.0

-4.3

-7.8

-5.4

Rubber

81.0

38.1

-17.4

-0.9

-8.7

-5.0

Source: EIU forecasts; e = estimate; f = forecast

Emerging market manufacturers expect
future price pressures to be even more

intense than their developed market rivals.

“The greatest challenge we have
seen recently has been the overall
increase in price of raw materials,
such as iron ore and coke, which
has affected our gross margin,”
says Henry Yu, CEO of General Steel
Holdings, Inc. (GSI), a privately held
Chinese steelmaker that plans to
increase output to 6 million tons this
year, from 4 million tons in 2010.

10

These cost concerns are exacerbated
by intense competition and pressure to
keep prices down, the second-biggest
challenge, cited by 40 percent of survey
respondents. For many, price increases will
be unavoidable: 63 percent of executives
agree that they will be forced to pass on
higher costs to their clients in the year
ahead. Rounding off the trio of challenges
is uncertain demand (35 percent).

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

KPMG Insight

Marty Phillips

KPMG Global Head of Aerospace & Defense
The aerospace and defense (A&D)
sector is used to weathering economic
ups and downs. Its exposure to
the fluctuations in government
appropriations has made the industry a
leader in instituting and managing cost
controls. That discipline will benefit it as
it looks to transfer those cost savings
into new growth opportunities.

“There is no question that the next
few years will see a marked upturn
in mergers and acquisitions.” says
Phillips.
”With government coffers dry, A&D
companies are looking to invest in
adjacent markets and products.” The
challenge, of course, is choosing which
commercial sector to enter. “A&D
organizations have a long memory,”
observes Phillips. “Many got burned
in the 1980s when they turned to a
stream of private sector initiatives,
from transportation to gaming. With

risk aversion high right now, many
companies are reluctant to sink money
into unproven technologies.” He adds,
“navigating the right commercial and
geographic markets to enter through

direct investment or joint venture can
be immensely difficult. A&D companies
know how to deliver when the market
is really, really good and really, really
bad. But the ‘in between’ makes it
hard to know what path to take. We
help organizations work through that
decision tree.”

“To gain clarity, organizations are
coming to KPMG for help in shoring
up their fundamentals, restructuring
their businesses, and spinning off
unprofitable assets.”

Marty Phillips

One client had two business units with
overlapping IT functions, for instance.
By combining those units, they cut
excess capacity and cost while also
slimming down their management
model.
Phillips believes it may take until 2014

before the A&D market sees a reprieve
in current market conditions. But, he
notes, “A&D companies have a fairly
high pain tolerance and they always
make a point of seeing to it that the
interests of shareholders are protected
whichever way the market turns.”

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

11

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Striving for growth
Despite all these challenges, many
manufacturers are clearly shifting from
a dual focus on cost containment and
top-line growth to a more singular
emphasis on growth. This is not to say
that cost containment will be forgotten.
Nevertheless, it signals a shift in
aspiration, after years of fire-fighting.

But if growth is back at the top of the
agenda, where will firms look for it and
what strategies will they implement to
realize it? And how are supply chains
being restructured to support this

growth? The rest of this report will
address these questions.

Which of the following aspects of your business will you
prioritize most?
19%

Top-line growth
Cost containment

13%

Product quality
11%
11%
11%
10%
11%
9%

Customer relationships
Operational efficiencies
R&D/innovation (including efficiencies in product
development life cycle processes)

7%

Back-office process efficiencies/shared services
Innovation/speed to market
Improved visibility on product costs

4%
3%

13%

25%

18%
16%

9%

6%

5%

past 1–2 years
next 1–2 years

Source: Economist Intelligence Unit survey, 2011.

12

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

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KPMG Insight

Eric Damotte

KPMG Global Head of Metals
“A weaker US dollar and steady
demand from China have made steel
and metals one of the bright spots in
the global economy in 2011.”
But steel is a cyclical business, and
Eric Damotte, head of KPMG’s global
metals practice, warns that the
sector’s performance may be affected
by the undercurrent of uncertainty
fueled by the European debt crisis
and the tepid US economic recovery.
That cyclicality is sharpening as steep
swings in the spot pricing of iron ore
squeeze profitability.
The growth picture is also more clouded.
“China has been the major driver of
growth representing between 40 to 50
percent of global production and demand,”
says Damotte, “but that growth rate is
probably not sustainable and foreign
entrants are precluded from getting
a piece, given Chinese government
controls.” Although some companies have
sought workarounds in the form of joint
ventures with Chinese partners, many
of these come with provisions, such as

restricted ownership and complex rules
that put into question the overall value.
Where then to look for growth? With
European markets mired in the debt
crisis and the US recovery hampered
by slow growth, the metals industry
has focused its sights on countries like
Brazil, India and Russia that are rich
in mineral resources and have rapidly
expanding physical infrastructures.
But those markets bring their own
challenges. Damotte adds, “in some
respects, Brazil has been overly
successful. The country has deep
reserves of iron ore and coking coal,
making it one of the best places
in the world to produce steel. But
the accelerating economy and the
revaluation of its national currency have
made the country an expensive place
to operate.” India is another popular
beachhead, but operators must contend
with a developing infrastructure,
complex environment, and a slow
decision-making process.

To compensate, Damotte says leading
players are focusing on sustaining cost
improvements.
“There is a tremendous amount of

invested capital in the steel business.
To justify the heavy fixed cost, the
traditional thinking was that plants
needed to produce non-stop. The idea
of shutting a blast furnace used to
be considered impossible, but not so
anymore. As technology has advanced,
producers can adjust capacity to cut
unnecessary costs.” The industry has
gotten a lot better at flexing production
capacity in line with demand and
reducing what used to be a fixed cost.

Eric Damotte

Intent on reducing finance and
inventory risk, buyers of metals
products are also keeping stock levels
low. “But this makes demand swings
more brutal,” says Damotte. “That’s
because when the market anticipates
possible price increases, buyers rush
in to lock up supply, prompting prices
to rocket up for a short while before
dropping sharply again when the rush
subsides.” As a result, better business
intelligence is a top agenda item.

“Scenario building has become
a real cornerstone of planning,

something that has taken off over
the last 12 to 18 months,” says
Damotte. “My clients realize they
need to plot a range of variables
– both quantitative and qualitative
– and plan contingencies
accordingly.”
Reflecting on the sector’s near-term
prospects, Damotte becomes
philosophical. “The economy works
like a self-fulfilling prophecy. When
negativity abounds, results reflect
that. The good thing about steel,
however, is that, cyclicality issues
aside, there will always be a certain
minimum of demand. Economies
are built on infrastructures, and
infrastructures are built with steel.”

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

13

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Growth strategies:
managing volatility
Manufacturers are reshaping their
business models in order to deal with

this more volatile world. More than half
(56 percent) of survey respondents agree
that their firms are changing models in
order to cope with market dynamics.
Just 15 percent say they are not. For an
industry that is often perceived as being
relatively slow-moving, this is a striking
figure. There are numerous shifts that
individual firms will make, but three
themes stand out:
• Manufacturing/sourcing closer to
growth markets;
• A greater focus on innovation and
product diversification; and
• More rigorous approaches to both risk
and demand management.

Operating closer to new sources of
growth
As in many other industries, the macro
trend of a steady shift eastwards
continues in manufacturing.

However, the US surprisingly
topped this year’s list for expected
demand in the next 12 to 24 months,
just barely edging out China for the
number one position.
India and Brazil both feature in the top
five as well, and Germany ranked fifth.

Manufacturers increasingly see emerging
markets as crucial demand engines.
More than half (52 percent) of survey
respondents agree that their growth
strategy is reliant on these markets.

Emerging markets are now more
important as sources of demand than
for low-cost production (54 percent).
Siemens, for example, is actively exploring
opportunities in lesser-developed
countries such as Indonesia and Thailand.
“The core of our strategy is to shift our
focus and look more toward [these]
markets,” says Barbara Kux, Siemens’
head of supply chain management, “in
order to ensure our planned business
growth.” Meanwhile, emerging market
manufacturers see little reason to leave
their core markets. “Demand within China
is significant enough that we have not had
the opportunity to explore such avenues,”
says GSI’s Mr. Yu. Delong’s Mr. Liguo
says that more than 90 percent of the
company’s sales go to Chinese customers.

Which countries do you expect to account for the majority of your new
business growth in the next 12 to 24 months?
Top 10 only

41%

40%
30%

9%

8%

8%

6%

Australia

Canada

Russia

12%

UK

Germany

Brazil

India

China

US

13%

Japan

20%

Source: Economist Intelligence Unit survey, 2011

3 Standard Chartered Research - The Super-Cycle Report - November 15, 2010

14

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


KPMG Insight

Andy Williams

KPMG ASPAC Leader for Diversified Industrials, KPMG in Singapore
As the world’s second largest economy,
some see China as having outgrown
its “developing nation” label, but Andy
Williams, ASPAC Leader for Diversified
Industrials, KPMG in Singapore, says

the reality is more nuanced. “There is no
doubt that China has grown significantly
on a commercial level. But, there are
enormous differences from region to
region within China. Some areas boast
thriving business centers, while others are
still decades behind in their development.”
However, there’s no doubting the growth
trajectory. By 2020 or 2030, the majority
of the world’s middle class is expected to
be in China.
While that strategy may give domestic
brands something to chew on, Western
companies have a lot to learn from the
Chinese way of doing things as well.
Chinese companies tend to go global
on a sector basis. They consolidate
domestically first, then look to buy
outside. Says Williams, “by the time a DI
sector, such as engineering, has gone
from being a thousand strong to just the
five top players, the scale, the cash on
hand and the acquisition experience are
usually massive.” That gives them the
means to move forward globally, buying
up big name companies and solidifying
their leadership on the international stage.
“The Chinese are masters at planning,”
adds Williams.

“The government issues a
meticulously detailed five-year plan
that gives a roadmap to the economic
and social priorities for China.
Citizens, both corporate and private,
tend to follow it rigorously. For
companies, that level of discipline
and planning helps them execute
with far greater consistency.”
Foreign DI companies have their own
maturity curve when it comes to

partnering with Asian suppliers. According
to Williams, “one mistake foreign
entities make when expanding into Asia
is to assume that the outsourcing or
partnership model they follow in Europe
or the Americas will work equally well
here. Asia-Pacific hosts a tremendous
mix of people, cultures and sub-cultures
all under one regional moniker. For that
reason, DI companies cannot apply the
same solutions unilaterally whether it be
globally or even within the region itself.”

Andy Williams

Although Williams is bullish on the DI
sector in Asia, he cautions that the
region’s rapid rate of growth probably

cannot continue at its present pace given
global economic uncertainties. While
the region was largely buffered from
the 2008 financial crisis, Williams sees
them as more exposed this time around.
“Domestic consumption sustained the
region during the last downturn, but
inflationary pressures in China, Vietnam,
Indonesia and others have cooled
demand, and, as we know, global markets
just aren’t buying right now.”
All this has put risk management more
firmly on the table. One way to manage
that will be through mergers and
acquisitions. Says Williams,

“The smart money is at the
commodities end of DI. Because
if you think of the value chain it
really is a case of ‘he who has the
raw materials wins’.”
“As a result, I expect my clients and
other Asian conglomerates will pursue a
more aggressive acquisition strategy to
lock in access.”
Looking out over the next 18 months,
Williams remains optimistic, but cautions
that folks can be overly positive. “The
opportunity is there; the demand is there.
But, success can be squandered if the

risks aren’t managed properly.”

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

15

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


But developed markets cannot be
discounted. The Power Solutions
division of Johnson Controls, a nearly
US$40 billion global manufacturer, is
a case in point. Its lead-acid batteries
sell well in emerging markets where
demand for new cars is soaring, but
sales remain steady in the US even
when car sales drop. “If someone
doesn’t buy a new car, they have to
replace the battery anyway,” says Alex
Molinaroli, the division’s president.
“So it’s a tale of two cities; flat or low
percentage growth in mature markets,
then emerging markets building rapidly.”
This West-East picture is even more
nuanced when it comes to sourcing.
China, India and Brazil are all top-five
targets among survey respondents.
But developed markets are hardly
being abandoned. The US is second,

the UK fourth and Germany sixth. This
development can be attributed to the
volatility of commodity costs, which
has added to the appetite of companies
to source from closer to home. Higher
oil prices mean higher transport
costs, making Western companies
increasingly inclined to shorten their
supply lines. Shorter and simpler
supply chains also allow firms to hold
less inventory, as restocking becomes
both simpler and quicker if your

suppliers are nearby. Ever-increasing
natural disasters are also causing
companies to think twice about relying
so heavily on a single source or single
region for key components.
Even for emerging market-based
manufacturers, the US is third (after
China and India) as a sourcing market.
For Western firms, the US narrowly
leads China. “We’re going in both
directions,” says Martin Richenhagen,
CEO of AGCO, a global manufacturer
of farm equipment with nearly US$7
billion in revenue in 2010. “We’ve got
our China investments, but also in
North America we’re going to invest in
expanding one of our existing factories

to start manufacturing high horse
power (wheel) factories, for the first
time in our history.”
An emphasis on new products
A second growth theme is a greater
focus on product diversification and
innovation. This is a significant shift
from recent years. Existing products
will be significantly less important in
existing markets, while much greater
emphasis is placed on new wares –
in both existing, and new, markets.
While cost management remains the
top priority, innovation and R&D come

in second. This will be a particular
priority for US firms, which rank R&D
and innovation on a par with cost
management. AGCO, for example,
has dramatically increased R&D
investment. “We’ve tripled the level of
spending, so it’s now close to
3.5 percent of sales,” says
Mr. Richenhagen.
Luvata is investing in both new products
and new markets, establishing factories
in Mexico and Malaysia. This helps give
it both geographic and product diversity.
“The [market] changes recently have
reinforced our strategy of being a

global player, in multiple end-business
segments. It’s been a good risk mitigator
for us,” says Mr. Kickham. “When auto
was having the most horrible time known
to mankind, people were still buying MRI
scanners and spending on healthcare.”
To support this drive for new products
and to lower product development
costs, 48 percent of manufacturers are
establishing design centers in emerging
markets. But talent shortages will be
a concern. The availability of skilled
workers now tops the list of human
resource concerns in emerging markets
(cited by 36 percent of all respondents).
There are differences between emerging
and mature markets, however.

From which countries do you expect to increase sourcing the most during the
next 12 to 24 months?
42%
36%

6%

6%

6%

Australia

Malaysia

9%

Japan

10%

Canada

Brazil

11%

UK

India

US

China

13%

Germany

30%

Source: Economist Intelligence Unit survey, 2011

16

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


KPMG Insights

Joerg Strater
KPMG Global
Head of Tax
for Diversified
Industrials

Richard Rekhy
KPMG Head of
Advisory,
KPMG in India

R&D Tax Considerations
The growing number of design centers
around the world and other dispersed
R&D activities give rise to a growing
need for better governance and controls
for the R&D function. Companies
frequently underrate the importance of
this need even though it serves as the
basis for the effective allocation of costs

and benefits resulting from local R&D.
Various tax aspects such as:
• appropriate license fees
• the recognition of capital gains on the
transfer of IP or business functions,

• the ownership of the newly created
IP can only be handled correctly if
the set-up of a new design center
and its role within the group’s R&D
framework is clearly defined.
We’ve seen companies that failed to
properly establish and control their
extended R&D activities end up in tax
disputes with various fiscal authorities
all over the world, an undesirable
scenario that can be avoided by some
advance planning.

Indian Developments

use local conditions to their advantage.
Adding to this momentum is India’s first
National Manufacturing Policy which
will help to create an eco-system of
national investment and manufacturing
zones to enhance India’s domestic
production and global competitiveness.
The policy aims to increase the
manufacturing sector’s contribution to

India’s GDP from the current 16 percent
to 25 percent by 2025.

As India moves up the value chain in
manufacturing, more global companies
are making India part of their global
supply chain, especially as companies
look to build out their R&D centers.
India is fast becoming recognized
as a producer of high value goods
that require substantial engineering
precision while Indian manufacturing
continues to diversify as global players

Which of the following is the primary focus area of your growth strategy for the coming 12 to 24 months,
and the past 12 to 24 months?

44%

Existing products in existing markets

25%
21%

New products in existing markets

25%
19%

Existing products in new markets

20%
11%

New products in both new
and existing markets

New products in new markets

19%
Past

6%
11%

Future

Source: Economist Intelligence Unit survey, 2011

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

17

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Companies based in mature markets
are especially likely to consider this
a challenge, whereas manufacturers
based in emerging markets worry about

development of executive-level talent.
Companies plan to grow both by
increasing production capacity (chosen by
36 percent of respondents overall) and via
mergers and acquisitions (M&As), joint
ventures (JVs), and strategic alliances
(39 percent). This is not surprising given
that companies are cash-rich after the
last few years of stringent cost saving
measures. Noteworthy from a regional
perspective is that European respondents
are overwhelmingly in favor of M&As,
JVs or strategic alliances (57 percent),
while respondents from Asia-Pacific and

North America slightly favor a more inward
approach, namely increasing production
capacity.
Rigorous approach to risk, cost and
demand management
Manufacturers have learned a lot about
risk in recent years. Looking ahead, risk
remains important for all, but will be
a particular emphasis for Asian firms.
Various interviewees spoke of their
investments both here and in demand
forecasting, to manage volatility.
Siemens, for example, has increased
its use of scenario planning. “Centrally,
we look at what the overall decisions

are and we get a rough picture of where
in the economic cycle each of our

sectors stands, and thus when they
might be influenced by a boom or hit
by a recession,” says Ms. Kux. Other
companies have developed detailed
demand forecasting tools, often based on
statistical views of end-markets. Some
track new indicators, such as architectural
billings, to gain a forward indicator
of residential construction, and thus
likely demand for products such as air
conditioning units or building parts.
Another crucial aspect of managing
volatility is better cost management.
And while manufacturers have notionally
embraced the pursuit of growth as a
strategic priority, none are loosening
their grip on costs. From an investment
perspective, this will remain the top
priority in both West and East.

Primary Approach for Achieving New Growth
44%

Forming joint ventures, strategic alliances,
and M&A

39%

28%

Increasing production capacity

30%
22%

Investing in research and development (R&D)/
new-product development
New sales offices

20%
5%
11%
Next 12–24 Months

Prior 12–24 Months
Source: Economist Intelligence Unit survey, 2011

Which of the following aspects of your business will you seek to invest more
and/or expand in the coming 12 to 24 months?
Percent respondents

Cost management

39%

Innovation/R&D

35%

Production capacity in high-growth markets

32%

Production capacity in domestic markets

24%

Supply chain resilience

24%

Risk management
Overall top-line growth

22%
14%

Source: Economist Intelligence Unit survey, 2011

18

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


Companies are becoming more
sophisticated about how they look at cost

efficiencies. The more straightforward
general and administrative expense
cost-cutting has already been done,
and to reduce costs further, companies
may well have to cut back in what were
formerly “untouchable” departments
such as engineering or R&D. For
example, 41 percent of respondents
say they will seek to reduce costs
by shortening their overall product
development life cycle. This will
largely come through restructuring of
engineering and product development

functions, improving technology systems
to promote collaboration with customers
and closer relations with suppliers.
Delong is focusing on improving
its operational cost efficiencies to
minimize the impact of volatility. GSI,
meanwhile, is actively exploring new
upstream partnerships or acquisitions
to better control costs. Ultimately,
however, given the severity of input
price increases, many manufacturers
will be forced to pass on cost increases
to clients: 63 percent of survey
respondents agree that this will be
unavoidable in the year ahead.

Manufacturers will also look to their
supply chains to manage volatility and
costs at the same time they focus
on growth. The top two cost-control
measures on which manufacturers
expect to focus in the next 12 to
24 months involve their supply chains:
one is collaborating more closely with
suppliers (40 percent); the other is
consolidating their manufacturing or
production sites (36 percent). It is clear
that supply chain management will be a
key focus for manufacturers seeking to
implement their growth strategies, as
the next section details.

KPMG Insights
Talent in China

Peter Fung
KPMG Head of
Industrial Markets,
KPMG in China

I find the two-year expatriate (expat)
model for foreign multinationals operating
in China to be ineffective. It takes six
months to learn the business in China
and six months to prepare to go home,
leaving only a year in between to make an

impact. It’s hard to make a good return on
investment in that short of a time.
It takes a committed person or team
willing to come to China and invest the
time to understand the market and build
strong relationships. I recommend at
least a three-year commitment, but
preferably five years.
Internal Benchmarking

Eric Damotte
KPMG Global Head
of Metals

Organizations have long been
interested in industry benchmarking,
but few take on the arguably tougher
task of digging into their own
processes and standardizing data
collection and reporting to compare
performance across plants and
locations. In my view, the ability
to derive that kind of business
intelligence is enormously important,
especially during times of extreme
volatility. I know an example of a global
steel manufacturer that brought

For foreign companies in China trying
to bypass the expat model altogether,

the discovery, attraction and retention
of local executive talent is no easy
feat. We advise companies to invest
in employee retention programs. One
particularly effective measure is to
recruit talent in China and send them
to the foreign headquarter location for
extended trainings or secondments.
There they learn the corporate
culture and develop the senior-level
relationships that they will need to
succeed in the executive roles when
returning to China.

an underperforming plant in a
mature market in line with one of
its emerging-market plants. They
compared a range of performance
outputs, from water to energy
usage, and substituted cheaper raw
materials. Before the benchmarking
project, the company had assumed
the discrepancy between the two
plants came down to labor cost and
geographical differences. Greater
visibility on a process level allowed
them to see the real cost drivers and
adjust accordingly.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

19

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


KPMG Insight
By showing an interesting
case of a manufacturer
grasping resource scarcity
as a driver for recycling,
the Global Manufacturing
Outlook underpins that the
sector is increasingly showing
leadership by turning global
challenges into opportunities,
thus safeguarding sustainable
economic growth in the
long run.
Yvo DeBoer
KPMG Special Global Advisor
on Climate Change and Sustainability

Which of the following cost control measures will you focus on in the coming
12 to 24 months?
percent respondents

Collaborating with suppliers to reduce costs

40%

Consolidating production/manufacturing sites

36%

Realigning our labour force to key growth areas

29%

Standardising key inputs/components,
eg. global or regional platforms

28%

Implementing shared back office/service centres

24%

Outsourcing

24%

Product range rationalisation
Reducing our labour force
Cutting back and/or holding off
on planned investments
Exiting unprofitable product lines
and/or geographies

22%

20%
16%
16%

Source: Economist Intelligence Unit survey, 2011

Case Study
Johnson Controls: Raw material price
pressures drive new recycling strategies
One of the implications of the
shift of the world’s center of
economic gravity eastwards
is a fundamental change in
competition for raw materials
such as lead. Just four years
ago, China accounted for 25 to
30 percent of global demand for
lead; it now accounts for nearly
70 percent. This has major
consequences for Johnson
Controls’ battery products.
“The biggest part of our core
lead-acid business is lead, so
the ability to secure lead at a

20

competitive price is crucial, as
it’s the biggest single item on
our bill of materials,” explains

Alex Molinaroli, the business
unit’s president.

and recycling operations across
its core US and European
markets – no mean feat
given that lead is both heavy
and toxic. Fortunately, it is
also an eminently recyclable
The firm has ramped up its
tracking of supply, right down to material. In turn the firm’s
specific levels of mining activity. supply situation has eased
significantly. “In the US, we
More significantly, it has
now recover and recycle
pushed itself to become the
97 percent of the lead we sell,”
world’s biggest lead recycler,
says Mr. Molinaroli. Other
taking back all old batteries to
manufacturers will no doubt
provide a steady supply. This
be assessing where they can
involves collection, distribution
follow suit.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.

KPMG Insight
Advanced Cost Management

Doug Gates
KPMG Principal,
Advisory, Business
Effectiveness,
KPMG in the US

Companies are still closely watching
cash expenditures and while there
is more emphasis now on growth
than two years ago, many are
developing approaches to more tightly
scrutinize new product development
expenditures and expected ROI. Many
DI companies have streamlined their

R&D staffs and integrated them into
core product groups to get the right
products to market, faster. We’re
seeing an increased focus now on the
development of global design standards,
processes, and systems to enable
design activities to occur as if in a virtual
global design center. This provides
greater design flexibility, which in turn
supports global build flexibility.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

21

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


KPMG Insight

Loek Helderman
Head of Global Tax Efficient Supply Chain Management,
KPMG in the Netherlands
Supply Chain Restructuring
Today’s environment demands an integrated
supply chain that takes a holistic approach both
inside and outside of company walls.
From an internal perspective, KPMG’s Value
Chain Management approach ensures that
supply chain decisions are not made in a vacuum.
When business and supply chain restructurings
take place, our plans integrate related factors in
addition to the commercial aspects, such as:
• Tax
• People/HR
• Legal & regulatory
• Finance, accounting and reporting.
If any additional developments in supply chain
and supplier management occur, we encourage

22

clients to revisit these factors to prevent possible
erosion of the commercial benefit or bottom-line
efficiency.
From an external perspective, an integrated
supply chain builds on relevant supplier
knowledge and innovation capabilities beyond
those that are internally available. To effectively
manage supplier relationships, I often advise
clients to establish a dedicated supplier account
management organization that is aligned to the
strategic objectives of the business, and fully
integrated into the company’s product innovation
platforms and R&D function. This is often best
achieved by developing partnerships with a
portfolio of strategic suppliers and combining a
benefits-sharing mechanism to improve quality
and service levels.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


KPMG Insight

Graham Smith

KPMG Global Head of Engineering & Industrial Products
After a year of uncertain recovery and

continued uncertainty, attitudes within
the Engineering and Industrial Products
(E&IP) sector remain cautious, according
to Graham Smith, head of KPMG’s E&IP
practice. “Last year, the predominant
focus was on cutting costs. This year, it’s
all about optimizing the back office and
support functions, making previous cost
improvements permanent and avoiding
the ‘cost boomerang’ effect where costs
creep back in.”
To that end, companies are doubling
down on performance measurement.
Smith observes, “management is taking
a much closer look at how budget dollars
are being spent and what the return is on
that investment.” That emphasis creates
a domino effect across the organization.
“Product managers and process owners
have much less tolerance for waste,”
adds Smith. “They know such inefficiency
acts as a drag on results and may lead
to reduced budget allocations for the
unit going forward.” As a result, many
more organizations are refining their key
performance indicators to monitor this on
a continual basis, embedding them in the
culture of the business and using them to
guide spending decisions.
But while E&IP companies are looking

to capitalize on efficiencies made over
the last 12 to 18 months, most are intent
on growing top-line results as well.

“Cost management isn’t going
away, but leaders in the
sector know that competitive
differentiation will come from
innovation and R&D.”
Smith expects engineering and industrial
companies to channel cost savings toward
new and faster product development and
strategic acquisitions that will strengthen
their product portfolio and give them a leg
up in key geographies.

Graham Smith

“Product development and speed of
response are key as flexible and more
nimble organizations will win more market
share by taking it from competitors in
the current economic climate in mature
markets,” Smith asserts. Greater
consolidation will take place as stronger,
leading players refine their business
models and enter into more joint ventures
and partnerships in the emerging markets
of Brazil, Russia, India and China (BRIC),
as well as other accelerating economies.

“Having shored up their operating
structures over the past two years, many
E&IP organizations are now well-poised
to seize opportunities in high-growth
markets. This in turn will mean revisiting
the appropriateness of their operating
models to ensure they are lean, flexible,
contain minimum fixed costs, and can
deliver an acceptable shareholder return.”

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

23

© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.