2011 Global Manufacturing Outlook Survey-Final

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 Dr. Steve New Fellow: Management Studies, Oxford Universitys Sid Business School Martin Richenhagen Chairman, President and Chief Executive Officer, AGCO Henry Yu Chief Executive Officer, General Steel Holdings
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.
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 organizations global annual revenues in US dollars?
2. Which of the following best describes your title?
0.9% 0.5% 3.6% 1.4% 13.2% 15.9% 6.4%
Board member CEO/President/Managing director CFO/Treasurer/Controller COO CIO/Technology director Other C-level executive SVP/VP/Director Head of business unit Head of department Manager Other
$1bn to $5bn
21.36%
$6bn to $10bn $11bn to $25bn

48.18%
12.7%
More than $25bn
18.18%
5.9% 17.7%
21.8%
12.27%
3. In which region are you personally based?

3.64% 0.45%
4. What is your primary industry?
10.00%
21.36%
Western Europe North America

31.36%
30.91%
Engineering and industrial products (including industrial electronics) Aerospace and defense Conglomerate (eg, multi-industry organization)
Asia-Pacic Middle East and Africa

22.27% 25.45%
24.55% 30.00%
Latin America Eastern Europe
Metals
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 years 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 years 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 todays volatile global economy and distance themselves from the competition. Despite the prolonged uncertainties DI businesses face, many companies emerged from the 20082010 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
Content
Executive summary The business outlook: growth ahead, but risks loom Growth strategies: managing volatility Reworking supply chains to support growth Conclusion
4 6 14
24 33
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.
KPMG Global Manufacturing Outlook: Growth while Managing Volatility
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. Were going in both directions, says Martin Richenhagen, CEO of AGCO, a global farm equipment manufacturer, of his organizations 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).
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 Managements 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 organizations 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 201011, weve doubled our profits and we expect to be back at 2008 levels by the end of 2011, says Bob Kickham, the firms senior vice president for procurement. Next year, we see that trend continuing, with double-digit increases, while were 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 countrys 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 Europes 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
How optimistic are you about your business outlook in the next 12 to 24 months?
51%
53%
27%
25%
21% 15% 2% 6% 1%
Very pessimistic
Very optimistic
Optimistic
Neither optimistic nor pessimistic
Pessimistic
2010 Survey
Source: Economist Intelligence Unit survey, 2011 and 2010.
2011 Survey
Purchasing Managers Index: Manufacturing

January 2008July 2011, a reading above 50 indicates a general expansion; below 50 a general contraction
70 60 50 40 30 20 10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 0
Source: Institute for Supply Management (ISM)
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 Chinas 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 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. Im 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.
David Frey KPMG Partner, Advisory, KPMG in China
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
Price volatility on key cost inputs Intense competition and pressure on prices Uncertain demand Risk and reliability in the supply chain Efciency in R&D/product development process Increased regulation in our industry Managing geopolitical risk Improve technological efciency Prospect of tax increases Lack of access to capital or credit
Source: Economist Intelligence Unit survey, 2011.
44% 40% 35% 27% 24% 23% 21% 15% 15% 10%
Growth and price forecasts

20102015
2010e
2011f
2012f
2013f
2014f
2015f
Real GDP growth (PPP exchange rates)

World OECD Non-OECD 4.9 2.9 7 .4 4.1 2.2 6.5 4.2 2.3 6.5 4.3 2.3 6.4 4.3 2.4 6.5 4.3 2.5 6.5
Real GDP growth (market exchange rates)

World North America Western Europe Asia & Australasia (including Japan) Oil prices: Brent; US$/b Industrial raw materials Metals Fibres Rubber
Source: EIU forecasts; e = estimate; f = forecast
3.8 2.9 2.0 6.5 79.63 44.5 39.0 42.2 81.0
2.9 2.4 2.1 3.8 108.5 29.1 21.9 49.8 38.1
3.2 2.5 1.6 5.1 94.50 -7.0 2.8 -30.0 -17 .4
3.2 2.5 1.9 4.5 90.00 -4.8 -5.7 -4.3 -0.9
3.1 2.5 1.7 4.4 85.00 -5.9 -4.8 -7 .8 -8.7
3.2 2.6 1.7 4.5 83.00 -3.0 -2.0 -5.4 -5.0
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.
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).
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Marty Phillips
KPMG Insight
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. 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.
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
To gain clarity, organizations are coming to KPMG for help in shoring up their fundamentals, restructuring their businesses, and spinning off unprofitable assets.
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.
Marty Phillips
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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?
Top-line growth Customer relationships R&D/innovation (including efciencies in product development life cycle processes) Cost containment Innovation/speed to market Product quality Operational efciencies Improved visibility on product costs Back-ofce process efciencies/shared services 3% 6% 7% 5% 4% 9% 9% 11%
past 12 years next 12 years
19% 11% 11% 11% 10% 16% 13% 13% 18%
25%
Source: Economist Intelligence Unit survey, 2011.
12
Eric Damotte
KPMG Insight
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 KPMGs global metals practice, warns that the sectors 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. 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. Thats 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.
Eric Damotte
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 sectors 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.
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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 years 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 GSIs Mr. Yu. Delongs Mr. Liguo says that more than 90 percent of the companys 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% 20% 13% 12% 9% 8% Australia 8% Canada 6% Russia
US
India
Brazil
Germany
China
UK
Source: Economist Intelligence Unit survey, 2011
3 Standard Chartered Research - The Super-Cycle Report - November 15, 2010
14
Japan
Andy Williams
KPMG Insight
KPMG ASPAC Leader for Diversified Industrials, KPMG in Singapore

As the worlds 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, theres no doubting the growth trajectory. By 2020 or 2030, the majority of the worlds 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. 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. Although Williams is bullish on the DI sector in Asia, he cautions that the regions 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 arent 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,
Andy 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
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 arent managed properly.
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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 doesnt buy a new car, they have to replace the battery anyway, says Alex Molinaroli, the divisions president. So its 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. Were 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. Weve got our China investments, but also in North America were 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. Weve tripled the level of spending, so its 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. Its 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% 30%
13%
11%
10%
9%
6% Japan
6% Australia
6% Malaysia
China
Brazil
US
India
UK
Germany
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Canada
KPMG Insights 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 groups R&D framework is clearly defined. Weve 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.
Joerg Strater KPMG Global Head of Tax for Diversified Industrials
Indian Developments 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
Richard Rekhy KPMG Head of Advisory, KPMG in India
use local conditions to their advantage. Adding to this momentum is Indias first National Manufacturing Policy which will help to create an eco-system of national investment and manufacturing zones to enhance Indias domestic production and global competitiveness. The policy aims to increase the manufacturing sectors contribution to Indias GDP from the current 16 percent to 25 percent by 2025.
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?
Existing products in existing markets 21%
44% 25%
New products in existing markets
25% 19% 20% 11% 19% 6% 11% Past Future
Existing products in new markets
New products in both new and existing markets
New products in new markets
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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

Forming joint ventures, strategic alliances, and M&A 28% 30% 22% 20% 5% 11%
Prior 1224 Months
44% 39%
Increasing production capacity
Investing in research and development (R&D)/ new-product development New sales ofces
Next 1224 Months
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 Innovation/R&D Production capacity in high-growth markets Production capacity in domestic markets Supply chain resilience Risk management Overall top-line growth
39% 35% 32% 24% 24% 22% 14%
18
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 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. Its 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 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.
Peter Fung KPMG Head of Industrial Markets, KPMG in China
Eric Damotte KPMG Global Head of Metals
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.
19
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 Consolidating production/manufacturing sites Realigning our labour force to key growth areas Standardising key inputs/components, eg. global or regional platforms Implementing shared back ofce/service centres Outsourcing Product range rationalisation Reducing our labour force Cutting back and/or holding off on planned investments Exiting unprotable product lines and/or geographies
40% 36% 29% 28% 24% 24% 22% 20% 16% 16%
Case Study
Johnson Controls: Raw material price pressures drive new recycling strategies One of the implications of the shift of the worlds 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 competitive price is crucial, as its the biggest single item on our bill of materials, explains Alex Molinaroli, the business units 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 firms 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, worlds 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.
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KPMG Insight Advanced Cost Management 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. Were 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.
Doug Gates KPMG Principal, Advisory, Business Effectiveness, KPMG in the US
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KPMG Insight
Loek Helderman
Head of Global Tax Efficient Supply Chain Management, KPMG in the Netherlands Supply Chain Restructuring Todays environment demands an integrated supply chain that takes a holistic approach both inside and outside of company walls. From an internal perspective, KPMGs 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 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 companys 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.
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Graham Smith
KPMG Insight
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 KPMGs E&IP practice. Last year, the predominant focus was on cutting costs. This year, its 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 isnt 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. 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.
Graham Smith
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Reworking supply chains to support growth

Given the highly varied nature of manufacturing, supply chain strategies also vary widely. Depending on the sector, some are highly centralized while others are highly distributed, for example. Nevertheless, a number of trends stand out: A shift toward standardization Increased localization and responsiveness Tighter collaboration with suppliers A greater emphasis on risk management. Standardization of parts and processes One priority for manufacturers is standardization, in terms of both production processes (55 percent) and inputs (45 percent). According to survey respondents, these are the top two supply chain initiatives that firms plan to embrace.
The appeal is clear: standardizing inputs across several products can help reduce the number of materials a company uses and, by concentrating on fewer materials, improve its purchasing power.
Standardized processes are similarly beneficial, enabling companies to share expertise from more efficient sites. AGCO, for example, has a major initiative under way to improve profitability, based partially on standardization. The project aims to improve the companys cost of goods sold, 75 percent of which is accounted
for by raw materials. AGCO has set up an internal process to standardize its production techniques across its global production network. For example, it is consolidating its manufacturing platform for midsize tractors to create a single platform. It is also constructing a new factory in China, to be launched in 2013, that will be used to build a single drivetrain for its various midsize tractors. The reason were doing this is that we expect significant cost savings, of around 600 to 800 basis points, says Mr. Richenhagen. In the longer term, it will also be used as a local production base. But standardization is not without risks. Dr. Steve New, a Fellow at Oxford Universitys Sid Business School, notes that some manufacturers that have taken standardization too far have created homogenous product lines that may fail to engage consumers or cater to the specific needs of customers.
KPMG Insight
Dr. Alexander Riedel

KPMG Partner, Advisory, Performance & Technology, KPMG in Germany Now that certain markets such as automotive are recovering, many are concerned over expanding too rapidly given uncertainty with long-term market signals. Realizing market potential over the next 5 to 10 years will require a greater level of coordination, cooperation, and collaboration between OEMs and suppliers. To optimize market potential over the next 5 to 10 years will require a greater level of coordination, cooperation, and collaboration between OEMs and suppliers. Prerequisites for success will include the tight alignment of demand forecasts, early sharing of new product concepts, and risk sharing on capital expenditures and new product development initiatives.
24
25
Given the shift toward a greater focus on new products, this is a risk that manufacturers will need to consider as they promote standardization. Another challenge will be managing the tensions that will arise between sales and procurement, as one function tries to push new products into the market while the other works to standardize inputs (see case study Luvata managing the tension between product uniqueness and input standardization on page 27). Increased localization and responsiveness A second theme, directly aimed at supporting the push into new markets, is in localizing or adapting
products. Forty-three percent of survey respondents selected this as a priority for their businesses, after standardization of inputs across product lines (45 percent). This is especially critical for emerging market firms, second only to process standardization. Bringing production closer to clients (cited by 33 percent of respondents) will make it easier to be more responsive to changing demand patterns, although some manufacturers would also benefit from reduced distribution costs. The problem with buying from China is that to do it well you need to buy in huge batches, says Dr. New. This makes it hard to respond to shifts in the marketplace, once certain volumes are
committed to. However, for some firms, seeking to bring production closer to end-customers raises another tension: a desire to consolidate manufacturing and production sites, as noted earlier, in order to better manage costs. Yet bringing supply chains closer to end-customers is unavoidable for some manufacturers. Johnson Controls Mr. Molinaroli notes that the nature of its battery business makes it fundamentally a local one. Because of the weight and the materials used in the companys batteries, a global supply chain does not work. We build our products and our supply chain all in the same region we serve, he says.
Which of the following is applicable for your business in the coming 12 to 24 months, in terms of its supply chain strategy?
We will increasingly seek to standardize our production processes across all sites Where possible, we will increasingly seek to standardize our inputs across product lines We are increasingly focused on customization/ localization of our products for key customers/markets We will seek to reduce costs by shortening our overall product development lifecycle We will seek to shorten our supply chain, to bring production closer to key clients/markets We will divest ourselves of products that are not core to our business to concentrate on our capital allocation We will acquire our suppliers to reduce the risk of supply and price/margin volatility of key inputs
55%
45%
43%
41%
33%
32%
31%
26
KPMG Insight
Gus Gaeta
KPMG Principal, Advisory, Business Effectiveness, KPMG in the US The Shift to Nearshoring The practice of near-shoring, or re-shoring to bring distant operations closer to the end market has become increasingly more important within DI and across other industries that have significant manufacturing or assembly elements. While the original motive behind off-shoring was to deliver cost savings by allowing companies to take advantage of labor, tax, or regulatory incentives, now rising costs in labor and logistics as well as high inventory carrying costs caused by longer lead times are starting to dilute those savings. These factors are causing companies to revisit their business models. As they embark on this process, I advise them to be diligent in choosing new locations as they expose themselves to intellectual property, currency, environmental, compliance and supplier risks that must be hedged by proactive business-continuity planning to minimize supply chain disruptions. As companies redistribute their global capabilities, I often suggest the following tips: 1. Analyze demand Examine how stable your demand is in a prospective region since you need to be confident that the volume needed to justify a major move is there and will remain. 2. Seek manufacturing centers of excellence Have a clear perspective of the capabilities that the location you are considering has to offer, making sure there is an abundance of the skill sets for your type of manufacturing. Look for manufacturing centers of excellence within your field. 3. Build strong procurement Ensure your procurement organization is strong enough to help you qualify sources and manage and monitor suppliers on a global basis. Your suppliers will need to be global and flexible enough to follow your footprint. 4. Expand existing operations Make sure that you are fully leveraging any local facilities and capabilities you may have rather than starting from scratch. It is easier to build upon existing capacity and infrastructure to expand a campus. Campus environments also lend themselves well to modular manufacturing because it is easier to add on, adapt and take away capabilities as needed, helping to increase flexibility and responsiveness.
Case Study
Luvata: Managing the tension between product uniqueness and input standardization Manufacturers strategy of expanding into new product areas can collide with the desire to increase supply chain standardization. Luvata is a case in point. One of the companys strategic aims is to expand into unique product areas, to avoid overly commoditized markets. However, Bob Kickham, senior vice-president for procurement, is pushing standardization to keep costs under control. All buyers are for standardization, he says. Unfortunately, our strategy is around getting niche and getting close to customers. For example, one of the firms operating units, which supplies tubes to the air conditioning industry, works to make these smaller and lighter, using new materials. Were trying to push the boundaries to make more efficient, non-standard products, he says. All this causes strong, healthy tension between the guys that manage the supply chain and those managing customers, says Mr. Kickham. Part of the solution is closer collaboration with suppliers. Were trying to create more and more forums not to beat up suppliers on raw price, but to look at how we can jointly take our costs and share value on that, he says. If we can look at smarter ways of reducing costs, while both making profits, thats a good place for us to be.
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Dr. Gerhard Dauner

Dr. Gerhard Dauner, KPMGs European Leader for Diversified Industrials (DI), sees uncertainty making a return. At the end of last year, says Dr. Dauner, people began to feel more optimistic. Order intake was increasing and consumer spending looked like it might make a return. But lingering questions over the debt crisis in Europe, the slow recovery in the United States and rising inflation in emerging markets have cast new doubts. As a result, he says, DI players in Europe are stepping back and questioning whether this is the right environment to make major acquisitions. With volatility expected to remain a constant well into next year, European DI companies are partnering much more closely with suppliers. Whereas one year ago, says Dr. Dauner, the emphasis was on risk and financial health checks to ensure supplier solvency, now its much more about managing the information flow. Today, managers are spending far more time exchanging information to gauge demand, adjust inventories and gain as much visibility as they can in order to be able to make short-term adjustments if required. However, it is crucial not only to maintain the flexibility to reduce capacity in periods of recession, but also to effectively extend production volume in order to seize business opportunities in times of economic revival. With so much volatility, it is inevitable that companies in industrial markets consider making structural changes to their operating model in order to secure a globalized customer and supplier base, while at the same time delivering optimized cost structures. However,
KPMG Insight
European Leader for Diversified Industrials, KPMG in Germany

Dr. Dauner explains. Furthermore, moderate growth expectations in Europe force entrepreneurs to think about broadening their presence in emerging countries that not only represent attractive customers and offer the potential for raising additional cost advantages in their supply chain. As DI entities flex their business models, many are taking a look inward to see if they have the right competencies and processes to capitalize on long-term trends. Dr. Dauner notes, DI organizations face a shortage of engineers and operations experts, not only in Europe, but in key locations around the globe. That issue has implications on the growth agenda as well. DI players in Europe recognize that they must invest in innovation and tools for growth. But many of my clients are grappling with the issue of how to allocate their R&D business globally and where to position their competency centers. To gain insight, Dr. Dauner says, DI organizations are digging deeper into their business data.
Dr. Gerhard Dauner
We talk about business intelligence, explains Dr. Dauner, but the challenge is turning that into strategic and operational planning intelligence in order to tease out emerging megatrends and position the organization to respond on a regional basis.
Mastering those issues is key to sustainability. Sustainable business used to be thought of as just a cost issue. But Dr. Dauner says DI leaders, particularly in Europe, see it as a core strategic issue, one that informs better sourcing, partnering and growth. Ultimately, sustainability is at the heart of profitability and serves as one of the ways that savvy organizations are looking to ride out continued market turbulence.
The future of cost management will not necessarily be about trimming costs, but rather about being innovative in achieving sustainable cost efficiency turning to proper working capital management solutions,
28
Closer collaboration with suppliers Cost, quality and reliability, the top three priorities for supply chains cited in last years research, remain at the top this year. Yet the importance of trusted relationships with suppliers has nearly doubled. One obvious reason is the need to deepen relationships in order to help ride out volatility in prices. A hallmark of this is a rise in longer-term contracts with suppliers, aimed at stabilizing key input prices. One-inthree survey respondents says his or her firms are seeking to increase the use of long-term contracts, while most others will retain existing contract durations. Another element is speed: working more closely with suppliers can help speed up operational processes and information flows, which in turn can assist with both cost and quality. Closer engagement with suppliers also supports the drive to develop new products. Siemens, for example, is encouraging supplier involvement much earlier in its projects. What we do more and more is to collaborate cross-functionally and bring our suppliers and R&D teams together in order to explore new ways to jointly optimize functionality and cost, says Ms. Kux. This activity was initially met with skepticism, given fears of exposing intellectual property. These worries have receded, however. Combining the suppliers innovational strength with our own adds value by revealing more efficient ways to meet specifications, says Ms. Kux. It doesnt help if suppliers talk to a supply chain management guy, and he then talks to R&D.
One example of Siemens successful collaboration with suppliers can be found with printed circuit boards, where slight size adjustments substantially reduce waste on the supplier side. Savings potential like these only become obvious when we [collaborate] with suppliers, says Ms. Kux. A greater emphasis on risk management and supply chain transparency The past few years have served as a wake-up call for many manufacturers. When asked to rate the effectiveness of various aspects of their supply chain, survey respondents are least confident about risk. For example, nearly one in five (18 percent) describes his or her organizations as not effective at managing supplier risk audits and a further one in three (32 percent) as only somewhat effective. But the depth of the recession, the impact of various natural disasters and a hugely unpredictable economic cycle have all forced firms to hone their risk management practices. Our risk management function includes the supply chain and goes all the way down to alternative suppliers, alternative materials, alternative locations, where capacity is, where we need capacity allocated and so on, says Mr. Molinaroli. Its all incredibly more robust than how it used to be.
Regarding your supply chain as a whole, which of the following are the most important attributes?
Cost Quality Reliability Trusted relationships Flexibility Access to talent Access to technology/R&D Proximity to production sites Ability to co-create on new products/components
15% 11% 14% 16% 8% 10% 7% 9%
Source: Economist Intelligence Unit surveys, 2011 and 2010
58% 55% 57% 45% 49% 14% 22% 30% 41%
66%
2011 2010
29
Many survey respondents say they are investing in risk management, especially in technology, to improve supply chain visibility (49 percent). Japans devastating tsunami highlighted how little many manufacturers knew about their supply chains. Increased supply chain complexity in recent years has been inevitable for many, as products have become more complex. Once things have a microchip within them, your supply chain is immediately 50 times more complex, says Dr. Steve New, a research fellow at Oxford
Universitys Sid Business School. As a result, even firms with relatively sophisticated supply chains can be impeded by disruptions. Hence the notion of supply chain visibility has been gaining traction: adding technology to gain a better understanding of where risks might lie will be the primary focus for manufacturers polled for this report. Most organizations have good visibility of their tier-one suppliers, and then it gets progressively cloudy beyond that, says Dr. New.
Which of the following tools/approaches will your organization rely on most in the coming 12 to 24 months to identify risk in your supply chain?
Use of technology to increase visibility across the supply chain Developing the risk management capabilities of key suppliers and/or setting appropriate standards
Conducting assessments of our supply chain processes Dashboards and alerts to provide early warning of issues
49% 45% 45% 40% 31% 27%
Use of simulations/scenario planning/impact assessments/continuity planning Increasing personnel/resources for our risk function
Source: Economist Intelligence Unit, 2011
KPMG Insight
Kimberly Rodriguez
KPMG Principal, KPMG in the US Tips for de-risking global supply chains: 1. Look beyond tier 1 suppliers to have real transparency in your supply chain. 2. Expand and correlate risk parameters to include geopolitical, economic and environmental risk issues in addition to the basic quality and delivery factors and build these factors into your sourcing and pricing decisions. 3. Make all associated risk data available in real time, regularly updated and benchmarked across the supply chain. 4. Evaluate your supply chain globally and implement processes regionally to account for the dramatic differences in supplier maturity, access to information, and quality.
30
Firms will also build on closer supplier collaboration to help develop the risk management capabilities of key partners (45 percent). Other tools, such as risk dashboards (40 percent) and the use of scenario planning or simulations (31 percent), are also gaining traction. Beyond the tools themselves, many firms are also working to ensure that they have multiple suppliers for key inputs. This is a balancing act, however, as having too many suppliers makes it difficult to develop the streamlined
supplier networks for which 51 percent of the survey respondents are striving. Overall, respondents strategies toward number of suppliers are fairly even: the proportion of firms planning to increase the suppliers list (29 percent) is balanced out by those that seek to reduce it (28 percent). In some instances, however, options may be limited. AGCOs Mr. Richenhagen says that despite the importance to manufacturers of having multiple suppliers for the
same components to combat risk, it is sometimes not feasible to do so. You cant just change an engine; this is a major operation, like open heart surgery, so it would take a huge amount of engineering and planning to change suppliers, he says. Instead, a greater emphasis should be devoted to understanding the financial health of suppliers. Whatever the approach, manufacturers will be focusing on such risk practices in the years ahead.
KPMG Insight Supply Chain Transparency Since the supply chain represents a significant share of the typical operating cost for a manufacturing company, even a slight uptick in productivity can create considerable savings. Rationalizing the supply base is one way to do this, but the disaster in Japan underscored the need for balance. As DI organizations continue to look for ways to reduce cost and the number of suppliers, they will need the visibility in their supply chain to avoid undue concentrations in any area and to get the flexibility they require in order to quickly react to changes in demand. Hence, we are seeing demand from our clients for tools and approaches that provide greater transparency across the supply chain.
Dr. Gerhard Dauner European Leader for Diversified Industrials, KPMG in Germany
31
Conclusion
As manufacturers pin their hopes on a return to growth, they will do so with fresh lessons in mind. Importantly, most are looking ahead to the coming years with much expected macroeconomic volatility with a robust approach to cost and risk management. In short, companies are: Employing sophisticated cost management techniques. Rising or volatile input prices are here to stay. Becoming smarter about cost management rather than rudimentary cost-cutting will become the ethos of the company and an important factor in every decision made. Improving and deepening both the corporate and supply chain risk management team and tools, and linking them to more detailed demand forecasting. Leading manufacturers are taking more vigorous measures to assess end-market shifts in order to respond more rapidly. Gaining a deeper understanding of the precise make-up and health of supply chains, beyond only tier 1 firms. Increasingly complex supply chains have exposed firms to hidden risks several tiers down. Manufacturers able to gain visibility of these relationships will be better positioned to identify and react to geographic and financial vulnerabilities. Increasing collaboration with, and supporting, key suppliers. Especially as cost pressures rise, deeper relationships with suppliers encompassing not only supply chain personnel, but also R&D, finance and other functions will continue to increase in importance. As one executive describes it, manufacturers have to realize that while the old industrial model was essentially a solo sport, with vertical integration from womb to tomb, the new model is far more of a team sport, with greater interdependencies requiring far more collaboration.
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KPMG Global Diversified Industrials Leaders:

Jeff Dobbs Global Head of Diversified Industrials T: +1 313 230 3460 E: jdobbs@kpmg.com Eric Damotte Global Head of Metals T: + 349 1456 3406 E: edamotte@kpmg.es Dr. Gerhard Dauner European Leader, Diversified Industrials KPMG in Germany T: +49 89 9282 1136 E: gdauner@kpmg.com Marty Phillips Global Head of Aerospace & Defense T: + 1 678 525 8422 E: mwphillips@kpmg.com Graham Smith Global Head of Engineering & Industrial Products T: +44 20 7311 4731 E: graham.smith@kpmg.co.uk Joerg Strater Global Head of Tax for Diversified Industrials T: +49 211 475 8381 E: jstrater@kpmg.com Andy Williams ASPAC Leader for Diversified Industrials KPMG in Singapore T: +656 411 8088 E: andrewmwilliams@kpmg.com.sg
Additional Key Contacts:

Yvo De Boer KPMG Special Global Advisor Climate Change & Sustainability KPMG in the UK T: +44 20 7694 2931 E: yvo.deboer@kpmg.co.uk David Frey KPMG Partner, Advisory KPMG in China T: +8 610 8508 7039 E: david.frey@kpmg.com Peter Fung Head of Industrial Markets KPMG in China T: +8 610 8508 7017 E: peter.fung@kpmg.com Gus Gaeta KPMG Principal, Advisory Business Effectiveness KPMG in the US T: +1 312 665 2389 E: ggaeta@kpmg.com kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the survey respondents and do not necessarily represent the views and opinions of KPMG International. 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. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Designed by Evalueserve. Publication name: Global Manufacturing Outlook 2011 Publication number: 110841-V2 Publication date: September 2011
Douglas Gates KPMG Principal, Advisory Business Effectiveness KPMG in the US T: +1 703 286 6691 E: dkgates@kpmg.com Loek Helderman KPMG Head of Global Tax Efficient Supply Chain Management KPMG in the Netherlands T: +31206 561415 E: Helderman.Loek@kpmg.nl Richard Rekhy Head of Advisory KPMG in India T: +91 124 307 4303 E: rrekhy@kpmg.com Dr. Alexander Riedel KPMG Partner, Advisory Performance & Technology KPMG in Germany T: +49 89 9282 1210 E: ariedel@kpmg.com
Kimberly Rodriguez KPMG Principal, Advisory KPMG in the US T: +1 313 230 3000 E: kdrodriguez@kpmg.com Michele Hendricks Global Executive for Diversified Industrials KPMG in the US T: +1 212 872 3641 E: mhhendricks@kpmg.com Martha Collyer Senior Marketing Manager KPMG in Canada T: +1 41 6 777 3505 E: mcollyer@kpmg.ca

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Global Manufacturing Outlook:

Growth while Managing Volatility

About the survey

$6bn to $10bn $11bn to $25bn

More than $25bn

3. In which region are you personally based?

4. What is your primary industry?

Western Europe North America

Asia-Pacic Middle East and Africa

Latin America Eastern Europe

KPMG Global Head of Diversified Industrials

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

The business outlook: growth ahead, but risks loom

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Neither optimistic nor pessimistic

Purchasing Managers Index: Manufacturing

Source: Institute for Supply Management (ISM)

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

David Frey KPMG Partner, Advisory, KPMG in China

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Senior Vice-President, Procurement, Luvata

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Growth and price forecasts

Real GDP growth (PPP exchange rates)

Real GDP growth (market exchange rates)

3.8 2.9 2.0 6.5 79.63 44.5 39.0 42.2 81.0

2.9 2.4 2.1 3.8 108.5 29.1 21.9 49.8 38.1

3.2 2.5 1.6 5.1 94.50 -7.0 2.8 -30.0 -17 .4

3.2 2.5 1.9 4.5 90.00 -4.8 -5.7 -4.3 -0.9

3.1 2.5 1.7 4.4 85.00 -5.9 -4.8 -7 .8 -8.7

3.2 2.6 1.7 4.5 83.00 -3.0 -2.0 -5.4 -5.0

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

KPMG Global Head of Aerospace & Defense

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

19% 11% 11% 11% 10% 16% 13% 13% 18%

Source: Economist Intelligence Unit survey, 2011.

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

KPMG Global Head of Metals

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Growth strategies: managing volatility

40% 30% 20% 13% 12% 9% 8% Australia 8% Canada 6% Russia

Source: Economist Intelligence Unit survey, 2011

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

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

KPMG ASPAC Leader for Diversified Industrials, KPMG in Singapore

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Source: Economist Intelligence Unit survey, 2011

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Joerg Strater KPMG Global Head of Tax for Diversified Industrials

Richard Rekhy KPMG Head of Advisory, KPMG in India

Existing products in existing markets 21%

New products in existing markets

25% 19% 20% 11% 19% 6% 11% Past Future

Existing products in new markets

New products in both new and existing markets

New products in new markets

Source: Economist Intelligence Unit survey, 2011

KPMG Global Manufacturing Outlook: Growth while Managing Volatility

Primary Approach for Achieving New Growth

Increasing production capacity

Next 1224 Months

39% 35% 32% 24% 24% 22% 14%