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Growth & Innovation

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In a climate of overall growth slowdown and faltering recovery, a recent KPMG study adds a ray of hope. According to KPMG's 2012 Global Manufacturing Outlook: Fostering Growth through Innovation, the prevailing climate of low economic growth is driving global manufacturers to seek new approaches in innovation and collaboration across the value chain, and creating a somewhat surprising shared optimism for expected high-margin growth in the next 12 to 24 months.

Innovation and collaboration are the twin engines transforming global manufacturing process. Since the Industrial Revolution, economic downturns have been followed by surges of innovation. Lean times call for frugality, which for corporations – especially manufacturers – means cutting costs and striving to operate more efficiently. These measures tend to lead to growth fuelled by innovation.

According to the KPMG survey, 76 per cent of the global respondents are optimistic about their business outlook over the next 12 to 24 months. This optimism seems to be buoying expectations that both sales and profitability will be up during the period with nearly half of respondents placing both top-line (43 per cent) and bottom-line growth (41 per cent) as main priorities.

The US is expected to lead the growth according to 40 percent of respondents, followed by China, India, Brazil and Germany.

"Manufacturers are not just preparing for growth but for ‘high-margin growth'," said Jeff Dobbs, KPMG's global head of Diversified Industrials and a partner in the US firm.

Ongoing challenges for manufacturers according to most respondents continue to be price volatility on cost inputs, risk in the supply chain, and uncertain demand.

"Manufacturers have acclimated to a world where volatility is the norm," Dobbs added.

"Today, manufacturers are leaner and more agile, many with strong balance sheets and healthy cash reserves – in a nutshell, they're poised for growth."

Sixty-two per cent of respondents say they are performing process improvements and refocusing on core competencies. Just over 50 per cent say they are eliminating unprofitable product lines and markets.

Talking about India in particular, Richard Rekhy, Head of Advisory, KPMG in India on ‘India's evolving manufacturing ecosystem' pointed out that as global supply chain patterns have shifted decisively towards Asia to reduce costs, India's comparative advantages in more advanced engineering are driving global players to expand their capacities in India helping to transform the Indian supplier ecosystem from a fragmented, single-tiered model towards a multi-tiered, more collaborative supplier network.

"In recent years, aggregate demand from the Indian market has become significant by global standards and is projected to sustain rapid growth over the next two decades or more. India now stands as an important source of growth for multinational manufacturers and leading industrials, who are no longer satisfied with addressing only a segment of the potential overall market here. In order to compete in the larger, more price sensitive segments, companies have ramped up their local sourcing, customized their designs to meet Indian requirements, and revamped their cost structures and manufacturing capacities. Building upon India's successful service base, many global manufacturers now have significant R&D facilities in India to capitalize on the abundance of local skills and capabilities, and this has naturally led to a focus on frugal designs targeted to the local market as well as other emerging markets.

With India's manufacturing sector maturing and moving further up the global value chain, the challenges for both domestic companies and invested global players lie in scaling up to increase volume and developing more sophisticated capabilities here to effectively address local growth, and beyond. I believe those companies that are willing to make the investment now stand to gain a substantial piece of the ‘high-growth market' pie in due course."

Greater Innovation Through Collaboration
Clearly, manufacturers are doing more than scaling back; they're also increasing activities in innovation and collaboration, keeping a longer view of a return to sustainable growth. A majority of respondents (72 per cent) believe that transformational innovation is either in full swing or will be so in 12-24 months, with US respondents leading in the view (84 per cent) that innovation is or will be well under way.

"After several years of focusing on cutting costs, many manufacturers realize that they have to invest in expanding their product and service offerings in order to remain competitive," commented Dobbs.

Globally, the highest percentages of manufacturers are looking to improve their processes and existing products over the next 12 to 24 months via increased "process innovation" and "incremental innovation", but "radical innovation" and "fundamental innovation" also ranked highly for increased activity.

Manufacturers from emerging markets outpaced those from developed markets by 10 and 14 percentage points, respectively, in their intent to increase radical and fundamental innovation in the next 12 to 24 months. Additionally, when respondents who planned to increase sourcing activities in China and India in the same period were asked which types of activities they planned to do, more than half selected "R&D" for China, and more than three fourths said "product development/design" for India.

Innovation is not going to happen in isolation according to the findings, but increasingly in collaborative arrangements over the next 12 to 24 months. Just over 60 percent of respondents globally said they will work more with customers for customized product development and with suppliers for product design.

"There's a decisive shift by manufacturers towards collaboration in the earliest stages of product development," Dobbs said. "This inclusive approach to innovation not only disperses potential risks, costs and rewards across the supply chain, but it also lets manufacturers focus on what they do best by leveraging the expertise of external partners and accelerating speed to market."

The collaborative environment is also having an impact on manufacturing business models, which are becoming more service-oriented. This may give manufacturers new ways to gain competitive advantage, for example in the provision of development and maintenance contracts and other collaborative services.

Shifts in their value propositions – such as new pricing models – ranked third (49 per cent) after cost structure and new sales targets as intended changes respondents plan to make to their business models.

This rise in value-added services is expected to boost profits. Nearly two thirds of respondents predicted new/enhanced customer services will make a significant or very significant contribution to profits in the next 12 to 24 months.

"In an attempt to buffer down-cycles, manufacturers are expanding their product offerings to include value-added services. While this may potentially add to their profit margins, it should also help them strengthen customer relationships and identify future sales opportunities,"

The KPMG report Fostering Growth through Innovation surveyed 241 senior manufacturing executives in February 2012. Respondents represented the aerospace and defense, metals, engineering and industrial products sectors, including industrial conglomerates. Below are key highlights:

All participants represent companies with more than US$1 billion in annual revenue; 33 per cent hail from organizations with more than US$10 billion in revenue. Nearly half (41 per cent) of respondents are C-suite executives or board members. They are geographically split among Western Europe (29 per cent),  North America (23 per cent), Asia-Pacific (28 per cent), Middle East and Africa (10 per cent) and Latin America (10 per cent).