Aiming higher how manufacturers are adding value to their business

Aiming higher
How manufacturers are adding value to their
business
A report from the Economist Intelligence Unit

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Aiming higher
How manufacturers are adding value to their business

Preface

A

iming higher: How manufacturers are adding value to their business is an Economist Intelligence
Unit briefing paper, sponsored by Siemens PLM Software and Microsoft. The Economist
Intelligence Unit bears sole responsibility for the content of this report. The Economist Intelligence
Unit’s editorial team executed the survey, conducted the interviews and wrote the report. The findings
and views expressed in this paper do not necessarily reflect the views of the sponsors.
The research drew on two main initiatives. We conducted a global online survey in FebruaryMarch 2010. In all, 355 executives took part. To supplement the survey results, we also conducted
in-depth interviews with senior executives and independent experts knowledgeable in the field of
manufacturing. The following individuals were interviewed for this report:
l Adam Buckley, head of programmes, The Manufacturing Institute (UK)
l Carlos Cordón, professor of manufacturing management, IMD business school (Switzerland)
l Matthias Dinse, managing director, AUMA (Germany)
l Pat Hassey, chairman, president and chief executive, Allegheny Technologies (USA)
l Frank Krause, director of competence development, Staufen (Germany)
l Ann Marucheck, chair and professor of operations, technology and innovation management, KenanFlagler Business School, University of North Carolina (USA)
l Per Hornung Pedersen, chief executive, REpower (Germany)
l Mike Zinser, partner, Boston Consulting Group (USA)

The author of the report is Sarah Murray and the editor is Iain Scott. Our sincere thanks go to the
executives who participated in the survey and interviews for sharing their time and insight.



© The Economist Intelligence Unit Limited 2010


Aiming higher
How manufacturers are adding value to their business

Executive summary

A

s manufacturers nurse their wounds after the worst recession since the 1930s, many are taking
a long, hard look at their business models and making some changes. For many companies, this
has meant increasing the proportion of revenue generated by non-traditional activities such as service
provision. For others, the soul searching has prompted a move from high-volume goods to high-value
products.
Although some of this was going on before the global financial crisis hit, the downturn has forced
manufacturers to step up their flight to value. With orders shrinking and the crisis threatening the
security of supply chains, many companies had to rein in their ambitions and focus more narrowly. At
the same time, cost-conscious industrial customers started to demand better value for money, such as
including post-purchase maintenance servicing as part of the deal.
Whether prompted by a fight for survival or a desire to get ahead of the competition, high-value or
value-added manufacturing is proving an increasingly popular business model for manufacturers. This
means different things to different companies—from speed of delivery, high-end products or unique
production processes to highly customised packages and environmentally sustainable product lines.
What is clear, however, is that organisations once primarily engaged in making products are now also

researchers, designers, services providers—and even retailers. As they look to increase revenue streams
and emerge from recession in a stronger position, manufacturers are redefining themselves as they
evolve from being makers of boxed products to sophisticated providers of “solutions”.
This report looks at the strategies companies are embracing as they battle to win market share and
how, in the process, they are starting to question the very notion of what it means to be a manufacturer.
The key findings from this research are highlighted below.
Manufacturers appear to be optimistic about business prospects. Some 61% of respondents to our
survey describe their business outlook as good, and that they expect things to continue to improve.
Over one-half (54%) are optimistic that the same applies to their sector. This optimism bears out at a
macroeconomic level: in the first quarter of this year, world trade rose sharply as business inventories
were restocked and confidence picked up again. This is in sharp contrast to a year ago, when barely onethird of manufacturers anticipated an upturn in business within the next year, amidst a general collapse
in trade globally.


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How manufacturers are adding value to their business

The recession has intensified efforts to target the high ground. In an ongoing flight from volume to
value, a growing number of manufacturers are changing their business models to target higher-value
products, deliver more customised offerings or bundle in additional services. Such a shift usually requires
a greater focus on innovation and more highly skilled workers—and both of these trends are in evidence.
Despite the tough conditions, a high proportion of manufacturers (40%) invested in research and
development (R&D) for product and process innovation over the last 12 months, while one in five (19%)
took on board additional highly skilled engineers and other workers.
Manufacturers are rethinking their supply chains. Alongside this shift towards value-added
manufacturing, firms are also rethinking their supply chains. Toyota’s fall from grace over quality
concerns has raised question marks about the once-heralded “lean” manufacturing approach. Others

are considering suppliers nearer to home, especially as oil prices and related transport costs rise, while
many are cutting back on their supply chains. Almost one-half (48%) of executives say they are looking to
shorten or simplify their supply chains. Many are simply looking to bring previously outsourced process
back in-house. Regardless of the approach taken, suppliers are being squeezed on costs: more than onehalf (53%) of respondents say that they will be looking to form partnerships with cheaper suppliers.
Cost concerns continue to loom large. Steel, iron ore and copper are just some of the raw commodities,
crucial to many manufacturers, that have been rising in cost as the global economy rebounds. A year ago,
as credit dried up and banks sought to avoid risk, manufacturers worried most about a lack of access to
capital. But as the economy has improved, raw materials costs are back at the top of the agenda, along
with transport costs. More than one-half (55%) of manufacturers polled cite rising materials costs as a
primary risk, while one in five (22%) cite transport costs as well. Pressure to keep prices low (34%), as
well as increased competition and currency fluctuations (both 32%), are other key risks.
Firms are reliant on their cash flow and bank loans for working capital. The most common mechanism
for funding operations is by far existing cash flow. However, 38% rely on bank loans, which may be a risky
strategy in view of the fact that bank financing is likely to be restricted, at least in the UK and Europe,
according to Economist Intelligence Unit expectations. Only a few (4%) rely on government subsidies,
but more than one-half (57%) of respondents say that government support for firms in the market in
which they operate has been either crucial or somewhat important in the last year.
The environment is rising up the agenda. Also supporting the notion that there is a flight to value is
the finding that more than two-thirds of manufacturers (67%) have already embarked on developing
“green” products or services, or plan to do so. This proportion rises to about nine in ten among
companies in the electrical equipment and appliances sector, as well as the textiles sector—driven in
part by rising legislative pressure to recycle products and reduce the use of toxic chemicals. This shift
towards greener products and services will also add to the need for greater innovation within firms—as
well as collaborations with new partners. In addition, the environmental agenda, whether driven by
sustainability initiatives or simple cost concerns, is also improving internal processes: 43% of companies
plan to cut their energy consumption in the years ahead.



© The Economist Intelligence Unit Limited 2010

Aiming higher
How manufacturers are adding value to their business

Key points

n Manufacturers are emerging from the downturn leaner and hungrier for new markets and closer
relationships with customers.
n Many are seeking to add value to their business propositions by offering more after-market services or
tailored products.
n To achieve this, they will need to attract and retain highly-skilled workers.

Introduction

S

Institute for Supply
Management,
Manufacturing ISM Report
On Business, April 2010.
1

Boston Consulting Group
Global Survey, Business
Executives Expect Difficult
Times to Continue in
2010—But Are Failing to Plan
Tough, Defensive Actions,
December 2009.

2



ince the beginning of the global economic downturn, manufacturers have been through a
harrowing time. From carmakers and yacht builders to technology component producers,
many firms have fallen over the edge of the precipice or have had their businesses snapped up by
competitors, the victims of contracting order books and collapsing supply chains.
Even for survivors, recession has had an impact on operations. Companies have looked for ways to
trim their operational costs through everything from staff lay-offs and cut-back product ranges to
partnerships with cheaper suppliers and energy-efficiency measures. “Last year at this time, there
was so much uncertainty that nobody dared to do anything,” confirms Carlos Cordón, professor of
manufacturing management at the IMD business school in Switzerland.
One multinational company in the electronics industry even did what Professor Cordón calls “the
unthinkable” and abandoned the idea of an annual budget. But today, the pessimism is not quite
so pervasive. “Companies are saying at least they know what is going to happen with a degree of
certainty,” he says. “They are more optimistic because they know what’s ahead.”
That optimism is reflected in this survey of manufacturing executives. More than one-half of
respondents now see their business outlook as good and likely to improve; even among those less
certain about the future, the sense of economic freefall no longer prevails.
The trend is supported by recent figures from the US. In April, the Institute for Supply Management
reported that factory output had grown for the ninth month in a row, and the manufacturing sector
had grown at its fastest pace since June 2004.1 Manufacturing output has risen in the UK too: in
April, the CIPS/Markit Purchasing Managers’ Index climbed to its highest level since September 1994.
Meanwhile, the UK’s trade deficit narrowed to £2.1bn in February, compared with a deficit of £3.9bn in
January.
Some countries are less optimistic than others. According to a survey of manufacturers conducted
in late 2009 by Boston Consulting Group (BCG), an advisor on business strategy,2 only 40% of Japanese
executives predict growth for their companies in the near term, compared with 62% worldwide. Fewer
than one-half of Japanese executives predict that Japan’s GDP will grow; the same number expect that

its economy will shrink.
Broadly speaking, however, optimism is gaining momentum. As it does, manufacturers are seeking
© The Economist Intelligence Unit Limited 2010


Aiming higher
How manufacturers are adding value to their business

ways to boost revenue. They have sought new markets overseas, for example, increasingly regarding
emerging markets as customers rather than simply as sources of cheap materials or labour. At the
same time, companies have brought back in-house many processes they had previously outsourced
to low-cost markets. Rather than companies seeing China as primarily the world’s factory, a more

Dealing with the downturn
Our survey reveals that over the past year manufacturers have
embarked on a raft of initiatives in a bid to boost their business
prospects. Yet while many of the measures they have taken are
commonly seen during hard times—such as management and
structural tweaks, fixing operational inefficiencies and laying off
staff—there is also evidence that companies are coming up with
new, more innovative strategies for boosting business.
Such innovation is necessary. Our survey shows that although
manufacturers are generally optimistic about their own business
prospects, they are less confident about their ability to access
previous levels of capital. Their customers’ finance prospects
are also a source of concern. “Things have improved, but for our
customers it’s still troublesome to get project financing,” says Per
Hornung Pedersen, chief executive of REpower, the German wind
turbine manufacturer.
Many respondents worry that the costs of raw materials,

transport and energy will rise, and that increased competition
and shrinking markets will pose risks to their business. To cushion
themselves against these risks, manufacturers have sought

cheaper suppliers, or simplified their supply chains, or tried to
reduce their energy consumption.
But recession has provided opportunities too. With plenty
of downtime on their hands and reluctance on the part of many
companies to get rid of their most valuable asset—skilled
employees—manufacturers have been putting their houses in
order and building competitive advantage. More than one-third
of respondents to our survey retooled their product development
processes to get goods to market more quickly, while 30%
diversified into new product markets. Some are investing in
skilled workers—Dyson, the British company best known for
its vacuum cleaners, announced in April that it planned to
double the size of its R&D team by hiring 350 new engineers
and scientists.
Manufacturers in some sectors, such as technology, hardly
broke their stride in the downturn. Apple launched its iPad
technology in April, in a move reminiscent of its decision to
launch the iPod music player during the last global downturn.
Furthermore, although many manufacturers have developed
service divisions as a result of the downturn, some technology
service companies have branched into manufacturing—witness
the move by Google and Microsoft to enter the smartphone space.

What are the primary risks to your business over the next 12 months? Select up to three.
(% respondents)
Rising cost of materials

55

Downward pressure on our own prices
34

Increased competition
33

Currency fluctuations
32

Shrinking markets
23

Rising cost of transport
22

Skills shortages
21

Lack of access to capital
11

Protectionist measures
10

Political instability
8



© The Economist Intelligence Unit Limited 2010


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How manufacturers are adding value to their business

balanced picture is emerging. Where outsourcing continues, companies in the US and Europe are
looking closer to home—to Mexico, for example, or eastern Europe.
Meanwhile, manufacturers’ business models are changing shape, as they shift to production of
higher-value products, or look to provide more services as part of their core offerings. Customisation
has also increased as companies seek closer relationships with customers.
“If someone needs something that’s different from what’s on the market, we develop alloys for
specific end users,” says Pat Hassey, chairman, president and chief executive of Allegheny Technologies
Incorporated (ATI), a US-based speciality metals company that has made customisation a central prong
of its competitive strategy. “We’ve learned to package in the way customers want, and since we have
flexible assets we can ship in multiples and quantities that might be very different from a large mill.”
To move into non-traditional activities and provide more tailored products to their customers,
manufacturers need to invest in R&D. In our survey, 40% of respondents have done just that, in order
to improve their product and process innovation capability. Respondents have also been hiring highly
skilled workers and are seeking new partners for product or process development. More than one-half
(57%) aim to accelerate innovation in both products and services, and 23% in products alone.
The implications are clear. Many manufacturers are realising that in order to thrive—if not simply to
survive—they need to enhance their innovative prowess and equip themselves with skilled employees.
In the process, they are moving manufacturing away from its industrial roots, embracing added value,
customisation and service provision.
The road to high-value manufacturing has seen some auspicious pioneers. It was the road taken
by Rolls-Royce, the British engine manufacturer, more than two decades ago. By 2004, more than
one-half of the company’s revenue came from after-market services.3 But those services contribute
to only part of what Sir John Rose, Rolls-Royce’s chief executive, sees as the company’s “high-value

activity”. In a speech to the Royal Society for the Encouragement of Arts, Manufactures and Commerce
in 2009, Sir John set out his definition of high-value manufacturing: “It is knowledge-intensive,
rich in intellectual property, requires high-level systems integration skills, demands and supports a
highly skilled workforce and an extensive supply chain, has a close involvement with universities, high
barriers to entry and creates significant converted value.”
Not every manufacturer will embrace value-added strategies to the same extent as Rolls-Royce.
However, in the process of retooling their business models at the tail-end of some tough times, many
are putting a greater emphasis on customisation, service provision and high-value products.

University of Cambridge,
Defining High Value
Manufacturing, January
2006.
3



© The Economist Intelligence Unit Limited 2010


Aiming higher
How manufacturers are adding value to their business

Key points

n For some manufacturers, moving into value-added areas has been a necessity of increased competition or
dwindling markets.
n Others have recognised that managing the data generated by their products is more lucrative than product
sales alone.
n Some regions, such as the UK, are worried about a talent shortage in coming years.

High-value visions

M

any manufacturers see that their future profitability lies in offering their customers higher-value
products, accompanied by a higher degree of customisation and an increasingly sophisticated
range of services. In fact, many manufacturers no longer describe themselves as such, preferring the
term “solutions provider”.
When asked what critical changes their organisations plan to make to their business model in the
year ahead, many of the manufacturing executives we surveyed point to high-value products. They
say their companies would supply products that are “more advanced and technical”, “more valuable”,
“value-added” or “niche”, as well as striving for “upward adjustment in the area of product quality”,
“providing superior tailored value” and focusing on “advanced technology product development” and
on “small volume custom” products.
These are fine ideals, but to achieve them manufacturers need to embark on research and
development. Our survey clearly indicates that manufacturers expect to step up their R&D investments.
In the year to March 2010, one-fifth of respondents spent 4-6% of their revenue on R&D; in the next 12
months, one-quarter will spend that proportion. Only a relatively small number—13%—aim to cut their
R&D budgets.
Meanwhile, manufacturers are moving from working purely in production. Some are engaging in
areas such as product design, while others are offering support services and customisation. In our
survey, one-third of respondents say they are engaged in top-end manufacturing, while over onequarter are engaged in design services and 17% offer additional consulting services. In the electrical
equipment and appliances sector, when it comes to top-end manufacturing and design services, these
figures rise to 54% and 40% respectively.
“Manufacturers are increasingly becoming service providers,” says Ann Marucheck, chair and
professor of operations, technology and innovation management at University of North Carolina’s
Kenan-Flagler Business School. She cites the example of IBM, which in 2004 sold its PC manufacturing
division to Chinese company Lenovo. “Today IBM gets the majority of revenue from its service arm,”
says Professor Marucheck. “But it was always very astute in offering field service, installation, training

and all sorts of what they would call ‘solutions’ around their products. They finally concluded they were
better service providers than they were manufacturers.”


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How manufacturers are adding value to their business

In the same year that IBM sold its PC division, Rolls-Royce reported that more than one-half of its
revenue came from services. In his 2009 speech to the Royal Society, Sir John Rose used as an example
his company’s engine health monitoring unit, which collects detailed data about the performance of
an engine in flight and transmits that data to operations centres, allowing the company to respond to
customers in real time. “This is a good example of how high-value manufacturing supports the most
advanced services, which only the manufacturer of the product can supply,” Sir John told the audience.
As manufacturers produce increasingly technologically sophisticated products, this kind of data
management could provide a new revenue stream. Rather than relinquishing responsibility for their
products at the end of their warranties, manufacturers retain responsibility—and, ideally, earn
customers’ respect and repeat business—through service contracts for running the data networks
needed to manage the information generated by their products.
REpower conducts 24-hour monitoring of its turbines for clients around the world. “Often the
services are done by someone in Germany doing a reset on a computer on a turbine standing in
southern Italy or Inner Mongolia,” says Mr Pedersen. “The data are interesting for the client because
they can see how the turbines are performing, so that’s part of the package.”
Sophisticated medical products also generate data that can be analysed and interpreted by the
same companies that produce them. One such company is Blue Chip, a Cambridge-based biotech firm
and producer of DNA diagnostics technology. The company not only produces microarrays, probes,
labelling systems and software, but also accompanying services such as metabolic profiling. Germanybased Fresenius, the world’s largest manufacturer of kidney dialysis machines, long ago realised that
the real money in the business was in running dialysis clinics. Fresenius now operates one-third of

America’s dialysis clinics, allowing it to dominate both markets.

Following the finance
The move towards solutions rather than products also reflects the concerns of lenders that emerged
during the downturn, as they sought to reduce their exposure to risk. “We see an increasing tendency
to go more for solutions, and that fits into project financing,” confirms Mr Pedersen.
Because wind power projects require many suppliers, from logistics providers to construction
companies, REpower will often include the services of those providers in a more comprehensive
package, according to Mr Pedersen. “The banks want less complexity, so that leads to deals where a
limited number of parties are providing the solutions, rather than having 20 or 30 different providers.”
In some cases, manufacturers’ push into high-value products is a result of the decline of their
sector overall. In Pittsburgh, for example, as the steel industry waned, new manufacturing industries
emerged in the life sciences sector, along with businesses built on the American city’s industrial
heritage such as speciality metals producers. Some manufacturers in North Carolina’s once-thriving
textile industry, finding themselves unable to compete on price with rivals in Asia, have moved into
specialised products used by the healthcare industry. “Some of the remaining manufacturers are
dropping woven textiles and going on […] to become more customised contract textile makers,” says
Professor Marucheck.
Working more closely with customers on their product specifications has become a critical element
of ATI’s business strategy. Mr Hassey points out that his customers do not come to the company to buy


© The Economist Intelligence Unit Limited 2010


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How manufacturers are adding value to their business

a product but to fulfil a technical need. “If a customer wants a specific shape or size or some fabrication
done prior to receiving the material, we can accommodate those requests,” he says. “So we are doing

more fabrication and customising of the alloys.”
Professor Marucheck sees this approach becoming a central strategy for many manufacturers.
“Customisation is part of this ‘servitisation’ of manufacturing,” she says.

Are talent issues back on the agenda?

Engineering UK,
Engineering the future - a
vision for the future of UK
engineering, 2009.
4



In their new roles as “solutions providers”,
identifying and maintaining a steady supply
of talented workers will become increasingly
important for manufacturers. Many were forced to
lay off hundreds of workers during the worst of the
downturn, but retaining and hiring skilled workers
remains a high priority.
The issue becomes more important as recovery
starts to materialise. In our survey, more than onefifth of respondents cite skills shortages as a risk to
their business over the next 12 months. Almost the
same number have hired skilled workers over the
past year, even though the downturn forced many
companies to reduce their headcount.
It is not hard to see why. An overwhelming
majority (91%) of respondents say R&D investments
have been spent in-house over the past year, and

almost the same number do not expect this to change
in the next 12 months.
Meanwhile, many in the sector are concerned
that the talent pool is shrinking. Such fears seem
particularly prevalent in the UK, where prominent
industry figures such as Sir James Dyson—inventor
of the eponymous vacuum cleaner—have repeatedly
warned of a coming shortage of engineers. One
theory behind fears of a skills shortage may be that
older workers are retiring faster than they can be
replaced. “Keeping hold of those skills has been more
and more important,” says Adam Buckley, head of
programmes at the Manufacturing Institute, a UKbased industry group.
In the institute’s regular survey of manufacturers’

priorities, the issue of talent and skills has moved
sharply up the list of concerns, from seventh in the
fourth quarter of 2009 to second after production
costs in the first quarter of 2010. According to
Engineering UK, an independent industry group,
almost 600,000 new workers must be added to
the manufacturing workforce. It believes that
demographic shifts will lead to an 8% drop in the
number of 15-24-year-olds—the target group for new
engineering graduates—over the next decade.4
Aware that demographic trends are not in their
favour, companies have been less ready to lay
off workers than in previous recessions. “While
historically, in a recession, manufacturers have got
rid of people, this time they have looked at other

ways to keep hold of those scarce skills resources,”
says Mr Buckley.
Similar issues apply in the US, according to the
Boston Consulting Group (BCG). However, striking
a balance between being overstaffed and retaining
talented employees can be tricky for companies,
acknowledges Mike Zinser, a Chicago-based partner
leading the manufacturing sector practice at BCG. Our
survey backs up that assumption. Some respondents
say they will have to outsource more of their R&D
in the year ahead, perhaps indicating that they are
worried about attracting enough skilled engineers
in-house.
“Talent management is a critical area that a lot
of organisations are starting to focus on,” says Mr
Zinser. “But with the downturn you can only cut
so far without hitting the bone, so keeping the
key folks busy while not shooting yourself in the
foot economically is critical—that’s a hard balance
to strike.”
© The Economist Intelligence Unit Limited 2010


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How manufacturers are adding value to their business

Key points

n Tried and tested manufacturing models are giving way to greater in-sourcing and less complex supply
chains.

n Meanwhile, many former supply countries are themselves becoming increasingly important customers.
n Some manufacturers are aggressively pursuing new retail markets as they seek new channels for growth.

Challenging the old ways

I

f companies are moving towards newer high-value manufacturing models, they are also
questioning modes of operation that have long gone unchallenged. For a start, one of
the manufacturing models most often held up as exemplary—Toyota’s “lean production”
system—today looks decidedly less robust, in the wake of a damaging series of safety-related
vehicle recalls.
As shadows fall across formerly peerless exemplars such as Toyota, a slowdown in orders has
given many manufacturers a chance for reflection. In the process, a new interest in in-sourcing is
emerging as companies question where best to deploy their resources.
“Companies dedicate resources where they get the best return and in a growing market that
means investing in increasing capacity,” says Professor Cordón of IMD business school. “But when
growth is not there, some are looking at the opportunity to increase profits by bringing certain
activities back in-house and doing them better than a supplier because they are more specialised.”
The trend is not universal. Business partnerships—whether with local companies or those in
overseas markets—are on the rise. In our survey, more than one-half of respondents would look for
new partnerships with low-cost suppliers as a means of improving their cash position, and more
than one-quarter have stepped up their offshoring or outsourcing.
Nevertheless, complex global outsourcing networks are no longer seen universally as the key to
success. Almost one-half of respondents to our survey are looking to shorten or simplify their supply
chains, and one-fifth say that convenient location influenced their decision-making when selecting
another organisation with which to collaborate.
Transport costs also play a role in the trend towards in-sourcing or near-sourcing. More than twofifths of respondents to our survey aim to reduce their energy consumption in the coming year—the
Over the next 12 months, what change does your organisation expect to the following aspects of your business?
(% respondents)

Energy costs
Improvement
No change
Deterioration

10

51

20

24
31

53

35

34
42

Opportunities for
geographic expansion

Opportunities for industry
sector expansion

Transport costs

43

12

35
8

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How manufacturers are adding value to their business

third most popular option for improving cash positions. Falling currencies in some markets, and
rising labour costs in countries such as China and India, have also contributed to shifts in global
sourcing patterns.
“It hasn’t hit that inflexion point where China is becoming too expensive,” says Mr Zinser of BCG.
“But I see a lot more [US] organisations thinking about near-shore opportunities such as Mexico
that are more valuable, lower-risk, closer to consumers and now not that much more expensive.”
Meanwhile, as countries such as China and India continue to grow rapidly, companies are
beginning to look at emerging markets not only as suppliers but also as customers. Our survey shows
evidence that manufacturers have been seeking new markets. While 17% pulled out of less profitable
geographical markets, 30% moved into new ones during the downturn.
ATI has been increasing the sales volume of its products overseas, including to the markets
of the BRIC countries (Brazil, Russia, India and China). “We have speciality metals for which
the technology needed to make them is not in place in China, India or Brazil,” says Mr Hassey.
“So in targeted segments, we provide those economies with materials that they don’t produce
domestically.”
For some companies, the move away from global outsourcing has been a matter of necessity—
many suppliers went out of business during the downturn. For others, however, a rethinking of
value chains has led them to recognise the benefits of manufacturing certain products themselves.

“It’s almost a soul searching,” says Professor Cordón. “Companies are questioning everything—the
fact that they took for granted the growth over the past few years, and recognise that they need to
redefine themselves.”
As part of this, companies such as Apple, Sony, Lego and Nestlé (through its Nespresso clubs and
boutiques) are even becoming more aggressive retailers through stores that once served primarily
as branding vehicles. “Initially, this was a way to provide advertising and promotion,” says Professor
Cordón. “But they discovered that many of these shops had become interesting as channels
for growth.”

Joining forces
The manufacturers we surveyed have a good opinion of their abilities to innovate—more than twofifths say that they regularly set the benchmark for innovation in their industries. However, there
is always room for improvement, and while nearly 90% of respondents to our survey say that they
intend to boost their innovation capabilities in products and/or service provision over the next 12
months, getting there may not be so easy. Manufacturers refer to a raft of obstacles to effective
innovation, chiefly cost barriers (53%), uncertainty about customer demand (39%) and a shortage
of appropriate in-house skills (38%).
To overcome the last two of those obstacles, manufacturers indicate that they are prepared to
take some big steps. While they appear to be less keen on collaboration with suppliers or partner
companies in the year ahead, our survey indicates that manufacturers have a greater appetite for
less conventional forms of collaboration—with large corporations, with personal consumers and
even with competitors. Favoured partners will be financially stable, skilled-up and with a track
record in innovation, but manufacturers are overwhelmingly looking for partners who will give them
11

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What are the primary drivers for collaborating/partnering with more/fewer firms in the year ahead? Select all that apply.
(% respondents)

More firms

Fewer firms

Cost reduction
58

Access to new technologies
57

12

Access to new customers/markets
57

12

Access to specialist skills
45

15

To enable us to focus on our core business
27

31

Increase speed of product development
53

15

Spreading risk across multiple partners
12

21

Being driven to do this by key suppliers/customers
25

31

access to new technologies, new markets, specialist skills and more efficient product development,
ahead of simply helping to keep costs down.
Meanwhile, open innovation—in which companies work with partner firms to leverage ideas,
rather than keep them all in-house—appears popular with manufacturers, to the extent that onethird of respondents to our survey are now actively engaged in it.

12

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Shifting gear: A case study of AUMA
AUMA, a German manufacturing company, knows a thing or
two about how to keep things moving. It is in the business of
manufacturing valve actuators and gearboxes that are used in
process plants, in sectors as wide-ranging as water, oil, and military
shipbuilding. The firm opened for business in 1964, and more than
four decades later it employs 1,700 people worldwide and has a
turnover of around €340m.
But AUMA did not escape the downturn, most notably in the area
of workforce management. The family-owned company’s biggest
challenge has been to reduce its workforce while maintaining
productivity within the confines of Germany’s 35-hour working week,
according to Matthias Dinse, the company’s managing director. In
part, this has been achieved by keeping things in-house: AUMA has
retained core staff while axing those supplied by external labour
agencies. The rationale is that by investing in training and education
of in-house employees, experience is more likely to stay within the
company. Creating value through efficiency drives, however, is not
new to AUMA. “This is not a one-off as a result of the recession,” says
Mr Dinse. “We are constantly analysing and assessing our business
processes to see where we can make improvements.”
Indeed, German manufacturing firms are globally renowned
for their efficiency, which Mr Dinse attributes to two main factors.
First, Germany’s education system continues to provide skilled
workers. Second, over the past ten years German manufacturers
have invested heavily in scientific research to acquire knowledge of
their business, while simultaneously using specialised management
consultants to implement changes necessary.
But Frank Krause, director of competence at Staufen, a lean
consulting firm, is keen not to “amplify the cliché” that German

companies are more efficient. “Germany has been hit by the
recession just like every country,” he says. While it may be true
that German companies have successfully acquired knowledge, it
is important to distinguish between having this knowledge and
the ability to implement it competently. “This is a fundamental

13

distinction and one which many companies deviate from,” he says.
AUMA, it would appear, has understood the distinction and
has taken some steps to eliminate aspects of the business that
detract from the creation of value, including excess transportation,
overproduction and using more inventory than is necessary to
complete a project. Mr Krause warns that companies that fail to
evaluate their business and then take steps to address unnecessary
waste are unlikely to survive in the current climate.
As a result of research instigated by Staufen, AUMA has moved
from using a conveyor assembly to what is known as a one-piece flow
process or concept. This means that instead of building five units
simultaneously, it now completes one and only then moves on to
the next. The outcome is that it takes 30 rather than 50 minutes to
manufacture a single unit, thus eliminating costly waste. Another
focus for AUMA has been to make information technology (IT) an
integral, more efficient part of the business. From the time of their
initial enquiry, customers can have their product in their hands in
six weeks; ten years ago, they would have had to wait four months.
While AUMA continues to manufacture the core modules of
its products in Germany, the recession has led to assembly and
modification taking place in wholly owned subsidiaries in different
parts of the world. “This way we maximise efficiency without

compromising quality,” explains Mr Dinse. Because AUMA produces
just 80,000 to 100,000 units a year, it made sense to keep the
manufacture of the core components at home, thus ensuring
quality of materials and suppliers. However, rising import costs,
varied industrial standards and increasing demands for local
content production in international markets could be addressed by
assembling and modifying the product in the local market.
The upside of this is that AUMA now has a better understanding
of the requirements of its international markets, knowledge it hopes
to put to good use in plans for future expansion into Russia, eastern
Europe, Asia and South America. Mr Dinse describes the company’s
moves to add value by driving efficiency as a “cascade”. “We initiate
certain things at home and then transfer what we have learned
to different countries—always taking into account the different
mentalities and levels of education,” he says.

© The Economist Intelligence Unit Limited 2010


Aiming higher
How manufacturers are adding value to their business

Key points

n More and more companies are developing products for the green market, or making their processes more
eco-friendly.
n In some cases this move is driven by consumer demand; in others by regulatory pressure.
n Manufacturers are beginning to demand greener processes along their supply chains.

Green incentives

A

s the environmental agenda gains momentum, leading manufacturers are becoming more focused
on making greener products or reducing the environmental impact of their existing portfolio
of products. Companies doing so range from UOP, part of Honeywell, which has been developing a
green jet fuel from sustainable feedstocks such as animal fat, algae and camelina, to consumer goods
companies such as Marks & Spencer, whose “Greener Living” product line includes clothes made of
organic cotton or recycled polyester.
Our survey reveals that many companies are rethinking their product lines to meet demand for ecoproducts. More than two-thirds of manufacturers (67%) say they have already embarked on developing
products or services for the green market, or that they plan to, with this figure rising to 88% among
companies in the electrical equipment and appliances sector.
Moreover, as manufacturers become increasingly involved in developing their services business,
there is a further extension of this model—the leasing business, whereby the whole relationship of
the customer to a product changes from owner to temporary custodian. The environmental agenda is
another driver, prompting companies to espouse life-cycle assessments of the impact of their products,
and cradle-to-cradle approaches, whereby components of a product are recycled and returned to the
value chain.
This agenda is partly shaped by political forces. In Europe, legislation is supporting a life-cycle
approach to a product’s environmental impact, with Waste Electrical and Electronic Equipment (WEEE)
regulations requiring producers and retailers to retrieve and recycle their products at the end of their
lives. The WEEE legislation, which covers a wide range of products—from refrigerators, lighting and
electronic toys to computers and mobile phones—also allows for the rates of recycling to be increased
over time.
Similar legislation exists for the automotive industry under the EU’s end-of-life vehicles directive,
which promotes recycling of car components. Meanwhile, manufacturers are required to restrict
the use of substances, such as lead, cadmium, mercury and hexavalent chromium, in electrical and
electronic goods under the EU’s Restriction of Hazardous Substances Directive (RoHS).
Pressure to recycle products and make them less toxic will, in turn, also drive manufacturers to
look much further back in the supply chain. Sometimes, product improvements ride on the back of

14

© The Economist Intelligence Unit Limited 2010


Aiming higher
How manufacturers are adding value to their business

the environmental agenda. When SC Johnson, a US family-owned cleaning products manufacturer,
reformulated its Windex cleaner, reducing the amount of volatile organic compounds (which vapourise
into air pollutants) in the product, it also boosted the product’s cleaning power by 30%.
Manufacturers are also going back to the design stage of their products to seek ways of making them
easier to unpick at the end of their lives. This includes using a less complex range of materials and
deploying fixtures moulded into the product that allow the parts to snap together, reducing the need
for screws or bolts. The Think chair, designed and manufactured by Michigan-based Steelcase, is one of
its most popular office furniture products. More than 40% of the chair is made from recycled materials,
while 99% of it (by weight) is recyclable. It takes five minutes to disassemble the chair for recycling,
using simple tools such as screwdrivers and hammers.
“The whole environmental agenda—either as directives or consumer pressure—will drive
manufacturers to repair and remanufacture products rather than manufacture from virgin materials,”
notes Mr Buckley of the Manufacturing Institute.
Will your business develop new products/services over the next 12 months to specifically target the “green” or “eco” market?
(% respondents)

We have already done so

36

Yes, we plan to

32

Yes, we plan to, but not in the next 12 months
No, we have no plans
Don’t know/Not applicable

9
22
2

39

15

© The Economist Intelligence Unit Limited 2010


Aiming higher
How manufacturers are adding value to their business

Conclusion

C

ompanies are starting to see themselves as “solutions providers” rather than manufacturers. This
represents a significant shift away from old manufacturing models and requires companies to move
into new areas, whether that means increasing the proportion of revenue they derive from services,
rethinking their product line to include more high-value goods or becoming managers of the data
generated by increasingly technologically sophisticated products.
Moreover, for many companies, high-value manufacturing now includes products that incorporate

environmental sustainability into their design, materials and production processes. While leading
companies have been pursuing “green manufacturing” strategies for some time, they will come under
increasing pressure to bring environmental considerations into their product lines as consumers push
for more eco-products and climate change moves up the political agenda.
To make a success of these high-value, service-heavy offerings, manufacturers need to continue to
invest in R&D and build up their innovative capabilities. Our survey indicates that this is precisely what
many of them are doing.
However, another pressure is on the horizon—the return of tight labour markets, at least for
skilled workers. While the workforce imperative faded from view during the downturn, with company
lay-offs dominating the agenda, the prospect of ageing workforces in many places, combined with a
growing need for skilled employees, means that talent management will become a critical strategy for
manufacturers.
The need for talent will only increase as companies embrace value-added business models
that demand intensive R&D and a growing emphasis on customisation and services, but for many
manufacturers, collaboration and open innovation will offer solutions.
For many companies, the recession has been a period of intensive soul searching, in which longstanding business models have come under scrutiny. Whether the manufacturing sector—one of the
hardest hit during the downturn—is on the road to recovery or will continue to face difficult times,
savvy companies are recognising that business as usual is no longer an option.

16

© The Economist Intelligence Unit Limited 2010


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

Appendix
Which of the following statements best describes business opportunities in the next 12 months?
(% respondents)

Your business

Your sector

Good, and we expect the outlook to improve
61

54

Good, but we expect the outlook to worsen
9

10

Somewhat affected, and expect the outlook to worsen
7

8

Badly affected and expect the outlook to worsen
4
4

Badly affected but expect the outlook to improve
13

16

We do not expect any significant changes
6

8

Which of the following approaches will your company use to improve its cash position over the next 12 months?
Select all that apply.
(% respondents)
Seek new partnerships with lower-cost suppliers
53

Shorten/simplify supply chain
48

Reduce energy consumption
43

Improve access to working capital
34

Reduce head count and/or cut salaries and benefits
31

Deploy centralised procurement
29

Raise product prices
27

Reduce our product range
18

Close/mothball manufacturing facilities
17

Reduce R&D budget
13

Other
6

17

© The Economist Intelligence Unit Limited 2010


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

What are the primary mechanisms for funding your operations? Select up to two.
(% respondents)
Existing cash-flows
81

Bank loans

38

Shareholder capital
26

Government subsidies, eg for innovation
5

Other forms of credit
4

What are the primary risks to your business over the next 12 months? Select up to three.
(% respondents)
Rising cost of materials
55

Downward pressure on our own prices
34

Increased competition
33

Currency fluctuations
32

Shrinking markets
23

Rising cost of transport
22

Skills shortages
21

Lack of access to capital
11

Protectionist measures
10

Political instability
8

Other
3

Over the next 12 months, what change does your organisation expect to the following aspects of your business?
(% respondents)

36

25

No change

18

31

2

Company share price/
valuation

17

23
15

Opportunities for
industry sector
expansion

42

33

Opportunities for
geographic expansion

35

3

Availability of talent
53

35

35

12
14

43
3

51

8

34

3

45
46

Deterioration
Don’t know/
Not applicable

21

20

51

5

No change

Transport costs

24

22

Impact of regulation
relating to carbon
Improvement

48

7

Don’t know/ 3
Not applicable

Energy costs

27

54

Deterioration

Cost of raw materials

Financing costs

Availability of capital
Improvement

50

8
4

12
4

© The Economist Intelligence Unit Limited 2010


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

Which of the following has your company done over the past 12 months to add value to its business proposition?
Select all that apply.
(% respondents)
Made changes to management and/or organisational structure
49

Addressed operational/IT inefficiencies
43

Cut headcount
43

Invested in R&D for product and/or process innovation
40

Speeded up product development/time to market
35

Invested in emerging markets
31

Diversified by entering new geographical markets
30

Diversified by entering new product markets
30

Increased use of outsourcing/offshoring
26

Merged and/or acquired other businesses
23

Restructured financing arrangements
23

Sought new partners for product or process development
22

Added new high-skilled workers
19

Exited less profitable geographic markets
17

Other
3

What percentage of revenue does your organisation invest in R&D?
(% respondents)

Past 12 months

Next 12 months

None
6
6

1.0 %
23

17

2.0 %
16

19

3.0 %
13

16

4-6%
20

7-10%
10

11

More than 10%
9

19

10

© The Economist Intelligence Unit Limited 2010

25


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

Where is the majority of your organisation’s R&D investment spent?
(% respondents)

Past 12 months

Next 12 months

In-house
88

91

Outsourced
9

12

In your main market of operation, how important has government support been to the survival of firms in your sector?
(% respondents)

Crucial

18

Somewhat important

39

Neither important nor unimportant

21

Unimportant

22

How confident are you in your organisation’s ability to develop new innovations and bring them successfully to market?
(% respondents)
39

20

Highly - we regularly set a benchmark for innovation in our market

41

Somewhat - we occasionally innovate in our market

50

Not very - we rarely innovate in our market

8

Not at all - we lag behind our competitors

1

© The Economist Intelligence Unit Limited 2010

39


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

Over the next 12 months, does your organisation intend to collaborate and/or partner with more, fewer, or the same number
of other organisations, in comparison with the year prior?
(% respondents)

More

34

The same

50

Fewer

7

Don’t know/Not applicable

9

What are the primary drivers for collaborating/partnering with more/fewer firms in the year ahead? Select all that apply.
(% respondents)

More firms

Fewer firms

Cost reduction
58

22

Access to new technologies
57

12

Access to new customers/markets
57

12

Access to specialist skills
45

15

To enable us to focus on our core business
27

31

Increase speed of product development
53

15

Spreading risk across multiple partners
12

21

Being driven to do this by key suppliers/customers
25

21

31

© The Economist Intelligence Unit Limited 2010

62

39


Appendix
Survey results

Aiming higher

How manufacturers are adding value to their business

With which of the following does your company currently collaborate/partner, and with which does it plan to
collaborate/partner over the next 12 months? Select all that apply.
(% respondents)

Now

In the next 12 months

Partner companies (eg, to provide a combined product/service)
49

54

Large corporate clients (eg, bespoke product development)
39

42

Suppliers (eg, to co-operate on product design)
57

61

Competitors (eg, to share resources in the face of competition from a larger company)
14

19

Personal consumers (eg, online customer-led product support/feedback)
23

27

Technology providers (eg, IT specialists)
36

39

Other
2

3

Which factors are most critical for selecting another organisation with which to collaborate? Select up to three.
(% respondents)
Availability of skills
34

Ability to innovate
34

Financial stability
34

Appropriate mix of products and/or services
32

Contacts/relationships within a particular market/territory

30

Shared ethical values/ Common approach to treatment of employees and other stakeholders
25

Convenient geographic location
21

Common cultural fit/open communication
19

Firms with a similar amount to gain from relationship
18

Don’t know/Not applicable
3

Other
1

22

© The Economist Intelligence Unit Limited 2010


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

Which of the following best describes your company’s focus on innovation in the next 12 months?
(% respondents)

We intend to improve our innovation for both products and services

57

We intend to improve our innovation for products only

23

We intend to improve our innovation for services only

7

We do not expect any change to our focus on innovation

9

We expect to decrease our focus on innovation and concentrate on
our core products/services

3

57

What is your organisation's stance on “open innovation”, in which companies leverage both internal and external sources of
ideas rather than trying to develop these entirely in-house?
(% respondents)

39

We are actively engaged in this
33

We do not use open innovation
28

We have explored the concept but can't see how we might benefit from it
13

We have explored the concept but it is too difficult/costly for us to adopt
10

Have never heard of it
8

We have applied it in the past without success
6

We have successfully applied it before but are not doing so currently
3

23

© The Economist Intelligence Unit Limited 2010


Appendix
Survey results

Aiming higher
How manufacturers are adding value to their business

What are the main obstacles to innovating and/or developing new products/services in your company? Select all that apply.
(% respondents)
Costs involved
53

Uncertainty about customer demand
39

Lack of appropriate in-house skills
38

Competitive pressures
28

Poor management/leadership
27

Poor sales and marketing follow-up
23

Rapid rate of change in our industry
20

Regulatory constraints
18

Poor operational/IT infrastructure
17

Lack of standards
14

Other
3

Will your business develop new products/services over the next 12 months to specifically target the “green” or “eco” market?
(% respondents)

We have already done so

36

Yes, we plan to

32

Yes, we plan to, but not in the next 12 months
No, we have no plans
Don’t know/Not applicable

9
22
2

39

24

© The Economist Intelligence Unit Limited 2010