Into the eye of the storm

Aug 23, 2013

Into the eye of the storm

Manufacturing is a tough industry to be in at the best of times, and this has been compounded by bitter competition from all corners of the globe, sluggish growth, budget constraints, and volatile markets. While certain sectors of the global economy have seen renewed growth, there are persistent doubts over the Eurozone, US recovery and Chinese growth—and that’s just the tip of the economic turbulence.

“In the midst of the continuing focus on cost, some might say that suppliers have hunkered down to weather the storm,” says Jeff Dobbs, Global Sector Chair, Diversified Industrials for KPMG, in a 2013 global manufacturing outlook released with the Economist Intelligence Unit. “To the contrary…companies are positioning themselves for a new era of growth driven by innovation, collaboration across the value chain, and rapidly changing manufacturing and decision support technology,” he added.

Perhaps a silver lining is beginning to emerge behind the black clouds.  A March 2013 PwC survey of 58 US-based industrial manufacturing executives showed 78% of respondents expected revenue growth and 55% were optimistic over the prospects for the US economy in 2013, which has been accompanied by increases in R&D and new products at respondents’ organizations.

Suppliers are certainly looking towards a brighter future, but this optimism is tempered with caution: only 36% of respondents to the PwC survey were hopeful over the global economy’s prospects. “Despite respondent optimism in their overall economic outlooks, certain political and economic risks are making them more apprehensive when thinking about the outlooks for their own companies,” the report’s authors say.

Is the gloom fading?

Current economic indicators suggest an upturn for the global economy: a United Nations Industrial Development Organization (UNIDO) report released in June 2013 said world manufacturing output increased 1.7% in the first quarter of 2013, a rise from 1.3% in the final quarter of 2012.

Supporting these figures is the JPMorgan Global Manufacturing PMI index released in June 2013 indicating that global manufacturing production increased for the seventh consecutive month in May 2013, with output rises for the major nations, including the USA, China, Japan, Germany, the UK, South Korea and Brazil. The report also showed incoming new orders rose for the fifth consecutive month in May 2013, albeit at only a moderate rate of increase compared to April.

Commentators such as David Hensley, Director of Global Economics Coordination at JPMorgan, are cautious about reading too much into these numbers. “Although the global manufacturing sector recorded further growth of output in May, the rate of expansion remains sluggish. The good news is that the survey’s leading indicators of new orders and finished goods inventory are moving in a constructive fashion, hinting that output growth might pick up into midyear,” he said in the JPMorgan Global Manufacturing PMI index release.

UNIDO economic figures show that Europe remains economically weak, with quarter-to-quarter declines in France (-4.2%), Germany (-1.7%), Italy (-4.5%), the Russian Federation 

(-3.1%) and the UK (-2.1%). The authors of UNIDO’s report suggest that current growth is primarily sustained by the US and China, the world’s leading suppliers. “While the sustained growth of industrialized economies has been jeopardized by stagnation in Europe due to the austerity measures, developing and emerging industrial economies faced decline in external demand due to prolonged recession in industrialized economies,” the report’s authors said.

China is often seen as a buffer to global economic doldrums, but economic figures don’t provide a clear picture on its growth trajectory. HSBC China Composite PMI data released in June 2013 (covering both manufacturing and services) showed that while manufacturing and services output continued to expand in May, manufacturing output is rising at its slowest pace since October 2012.

“A soft patch in manufacturing growth continues to weigh on this industry and adds more downside risks to China’s growth rate in 2Q,” said Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research HSBC, in the China Composite PMI bulletin. The HSBC economist does see scope for recovery, as “the improving property market and Beijing’s renewed effort on expanding VAT tax reform nationwide could lend some support for the service sector’s future development.”

HSBC’s forecasts for Asia, however, appear less rosy. “Asia’s suppliers [have] hit another speed bump. A near-term lift appears unlikely, with new orders slowing and inventories still high,” says Frederic Neumann, Co-Head of Asian Economic Research, HSBC, in a June 2013 HSBC Emerging Markets Index report. The index showed Indian output decreased in May, the first drop since March 2009, while Vietnam saw declines in output, new orders and employment. In Taiwan, output and new orders decreased. However, there were recorded output rises in Indonesia and South Korea.

“Another slowdown in the pace of growth of manufacturing output in China may have negatively affected the rhythm of industrial expansion in other Asian countries. This is a reminder of the bigger impact that prolonged weakness of manufacturing in China could have on the emerging-markets space as a whole,” said André Loes HSBC Chief Economist, LATAM, in the HSBC Emerging Markets Index report.

Manufacturing chameleons

Companies are adapting to the new environment, according to evidence from 335 global executives in a KPMG and Economist Intelligence Unit report released in 2013. The KPMG report says suppliers are enacting several measures to counter the prevalent global economic instability. This includes viewing channel partners as part of a network to achieve a real-time view of demand, supply, and capacity. Increasingly, relationships with suppliers and partners are critical to responsiveness in the market and optimization in inventory, logistics and operations.

Companies are also increasing visibility in the supply chain to increase performance, agility and resilience. KPMG survey respondent Carol Burke, managing director of Unipart Manufacturing Group that services the auto, energy, and oil and gas sectors, sees the supply chain as playing a bigger role in helping companies meet their future goals. “Providing a combination of manufacturing, logistics, and consulting is going to be the way forward,” she told the authors.

A separate KPMG consumer-goods survey entitled ‘Consumer Executive Top of Mind Survey 2013’ asked more than 400 leaders from global consumer companies what issues were “top of mind” in 2013. Fourth on a list of 12 factors after consumer demand, growth, and innovation, comes the supply chain and procurement. “I am not surprised supply chain management is right behind the first three priority issues for executives,” said KPMG UK Partner Andrew Underwood in the report. “To achieve sales, growth and innovation, you have to make sure you can fulfil demand from the supply chain perspective. You have to have the necessary structure in your operating model and a robust supply chain strategy in place.”

For forward-looking suppliers, the supply chain has been placed at the centre of strategy, with suppliers seen as a source of creation, not just production and logistics. R&D and innovation is an increasing focus of attention for suppliers, with 42% of the KPMG report respondents expecting their company to invest 4% of their revenue into innovation over the next two years.

Different functions in the supplier world will need to work closer than ever to adapt to changes in trends.

Winds of change

Manufacturing is going through a process of evolution, a transformation that was highlighted by a McKinsey global manufacturing outlook from November 2012. Companies, the report says, “will be challenged to organize and operate in fundamentally different ways to create a new kind of global manufacturing company—an organization that more seamlessly collaborates around the world to design, build, and sell products and services to increasingly diverse customer bases.”

The McKinsey outlook cites several factors that suppliers must adapt to in order to survive in the current economic climate:

Sticking to the ‘business as usual’ approach and copying and pasting of old strategies will not work: a “granular” approach of adapting to details and environments is key. 

 “Granularity” requires tailoring products and supply-chain strategies to sub-segments, even in national or regional markets.

Major commitments must be balanced with risk and each decision not too costly to reverse, in order to remain agile and flexible in the market. 

Companies should strive to create an ecosystem of suppliers, researchers and partners to meet demand for faster product cycles. 

This requires utilising local knowledge and specialist expertise, along with data and analytical tools, to exploit long-term trends. Companies can then better manage both attendant risks and near-term uncertainties.

Investing in one’s organization is thus critical, to attract the right talent at all levels, promote emerging leaders, and acquire skilled workers.

Suppliers do not have the luxury of waiting out the vicissitudes of this global economic storm. Figures have not pointed unequivocally to recovery, and businesses must act now to move their business forward. Rather than shelter from the storm, suppliers must meet uncertainty head on, and business models have to evolve to adapt to an ever-changing environment. “One thing we know for sure,” says Dobbs in KPMG’s global manufacturing outlook, “the volatility that we have seen in the past five years will continue.”

“The strategies, relationships, and tools to compete in this ever-changing environment must become much more sophisticated,” Dobbs adds. 


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