This artcile first appeared in the March/April issue of ID. View it here.
Commitments for manufacturers to do more business globally are accelerating in 2012 despite economic, regulatory, and other uncertainties
According to the report, the overall economic outlook strongly influences demand for machinery and equipment, the staple products of the industrial manufacturing sector. CEOs in the sector are downbeat about the global economy: 40 percent expect it to decline in the next 12 months, although they are actually slightly more optimistic than their counterparts in the entire sample. Confidence levels among industrial manufacturing CEOs are down this year and lag slightly behind the levels seen across the total sample. Still, nearly four-fifths of industrial manufacturing CEOs are somewhat, or very, confident of revenue growth over the next 12 months, although just 18 percent believe the global economy will improve.
One reason for this optimism about their own companies’ prospects is the fact that industrial manufacturing CEOs are willing to revisit their strategy. Altogether, 71 percent expect to change course this year—and 13 percent expect to make fundamental alterations. Concerns about economic growth are a big driver: 67 percent of those who are planning strategic changes are taking a potentially slow economy into account. But it’s by no means the only factor. Customer demand is just as important, with 68 percent of industrial manufacturing CEOs citing it as a reason to shift direction. Competitive threats also loom for 64 percent, compared to 56 percent of the total sample.
Making It Happen
Industrial manufacturing CEOs, like their peers in other sectors, are now focusing on the upside rather than the downside. They are refashioning their business models to cope with a world where the risks and opportunities are increasingly interconnected, but the sources of growth are often local. This presents a few related challenges including reconfiguring operations to meet local market needs (building the right portfolio mix—the right infrastructure, operating model, strategic alliances, products, and services for the right markets; defending against micro risks and macro disruptions (managing the consequences of local risks that may become global disruptions—such as the political upheavals, nuclear disaster, massive floods, and unfolding sovereign debt crisis that occurred in 2011); and getting the right talent.
Balancing Global & Local Opportunities
A sensible strategy for globalization today means more than building cheaply in one location and selling in another. CEOs are investing to create fully-fledged operations in their priority markets to build deeper relationships with their customers, innovate anew, take advantage of local talent and brands, reduce risk, access capital, strengthen supply chains, and achieve other business objectives, depending on each market’s advantages.
In some countries, the manufacturing base is critical to overall employment levels, so governments have a natural interest. But while nearly half of industrial manufacturing CEOs worry that protectionism could prove a threat to growth, they are surprisingly blasé about any potential tightening of the rules: 58 percent are not concerned about the risk of over-regulation, compared with 43 percent of CEOs in the overall sample. Some are worried about taxes, though.
Many industrial manufacturing companies already operate globally. Our sample reflects the global spread of the industry. Around half have business interests in Western Europe and North America, and around half have a presence in East Asia. Many also have operations in Latin America (43 percent) and Central and Eastern Europe/Central Asia (44 percent). Industrial manufacturing CEOs are very optimistic about growth in all regions of Asia and Latin America, while most expect revenues in Western Europe to stay the same or shrink.
Tone From The Top
It’s critical to get growth markets right, and the commitment needs to come from the top. When asked how they would prefer to spend their time, nearly three-fifths of industrial manufacturing CEOs said they would like to devote more hours to developing operations outside their home markets (59 percent versus 49 percent of the total sample).
Which countries offer the best opportunities? The four BRIC countries fill four of the top six spots on the list—but traditional manufacturing powerhouses U.S. and Germany make the cut, too.
What are industrial manufacturing CEOs looking to do in these markets? While finding new customers heads their agendas, that’s not their only goal. Those aiming to expand in China are more than twice as likely as the overall sample to say they are planning to access raw materials or components. This may be partly because China has imposed trade barriers on some metals to protect its domestic industries. According to the British Geological Survey, China is the leading producer of 27 of the 52 critical minerals and metals. While there are other countries in which some of these metals are produced, there are a few strategically important metals, such as rare earth elements, which are almost exclusively mined in China.
For forward-looking industrial manufacturing CEOs, another big reason to be in China is to understand their future competition. Last year, China surpassed the U.S. in manufacturing volume for the first time ever, producing $2 trillion in goods. In its 12th Five-Year Plan (2011-2015), the Chinese government highlighted energy-saving and environmental protection and high-end equipment manufacturing as two of the country’s emerging industries, meaning both sectors are likely to enjoy continued support.
Delivering Custom And Sustainable Products
Industrial manufacturing CEOs are turning away from simply selling the same products abroad and at home, especially when it comes to the biggest market of them all—China. A full 63 percent of those who see it as a key market say that their company is modifying its products and services to meet local needs in China, compared to 46 percent of CEOs overall.
Far fewer industrial manufacturing CEOs say their company is designing products specifically for local emerging markets.It’s challenging—especially for smaller companies—to achieve economies of scale on machinery and equipment that’s developed for just one market. When it comes to the U.S., though, 45 percent of industrial manufacturing CEOs say their company is designing products specifically to meet local requirements. That may reflect tougher health and safety or environmental standards in the U.S.
Resilience To Macro Disruptions And Micro Risks
During 2011, global businesses had to confront a portfolio of global risks—from political upheaval and a nuclear disaster to massive floods and an unfolding sovereign debt crisis. Through it all, CEOs have learned that risk management focuses less on the probabilities, and more on the consequences of such events.
Western Europe (particularly Germany) is traditionally a manufacturing stronghold, but the current economic situation is weighing on the sector. According to Markit Economics, December 2011 marked a fourth straight month of contraction in the Eurozone, and prospects for the first quarter of 2012 are bleak.
Preparing For The Unpredictable
Many of the industrial manufacturing CEOs we surveyed are already feeling the impact of Europe’s sovereign debt crisis. More than half say their companies have been directly affected. Strikingly, almost as many (47 percent) are changing how they do business as a result. They are also re-assessing their strategy, risk management, and operational planning because of the earthquake and nuclear crisis in Japan, political upheaval in the Middle East, and other external events. In general, though, the initial phase of rapid adjustment after the financial crisis seems to have ended. Only 22 percent of industrial manufacturing CEOs plan to make major alterations to their risk management strategies in the coming year, although 40 percent cite changes in risk tolerance as a factor in changing their overall strategy.
For many industrial manufacturing companies, that most likely means taking a closer look at their supply chains. With so many companies operating across national and regional borders, supply networks have got longer and more complex. They are also potentially more vulnerable—which explains why 40 percent of industrial manufacturing CEOs are somewhat, or very, concerned about supply-chain security, compared to 34 percent of the total sample.
PwC’s Industrial Manufacturing practice comprises a global network of industry professionals strategically located in more than 30 countries around the world. The practice brings experience, international industry best practices, and a wealth of specialized resources to help solve business issues.