The Global Production Line

Feature Article | November 28, 2005 by admin

The Economist Intelligence Unit undertook the comprehensive “Business 2010” study between November 2004 and January 2005. One section dealing with the manufacturing industry surveyed 872 senior executives from this sector around the world. The executives represent 23 countries, half in Europe, 36% in the Asia-Pacific region and the rest in North and South America. Executives with specialist knowledge of the manufacturing sector were interviewed to provide added depth to the results. The results are summarized in the SAP-sponsored report “Business 2010: Manufacturing”.

Adaptability in pole position

Manufacturing companies must ensure that they remain adaptable in order to create value in the long term, which means that an adaptive business model is required. The need to react quickly to a change in demand is seen as more important than reacting to the market strategies of other manufacturers. The development of new products and services remains a key objective among the major management challenges cited by senior manufacturing executives. Accelerating the pace of innovation ranks only second on the list.
Accelerating innovation and the ability to respond quickly to change will be the driving force behind the development of business models and growth strategies between now and the year 2010. 46% of those surveyed include technological innovations among the developments that will have the greatest impact on the companies’ business models.
On the demand side, companies are under extraordinary pressure to accelerate innovation and change. 85% of those surveyed believe that production of goods and services will be predominantly demand-led. The faster companies can bring innovations to market, the better positioned they will be to move up the value chain – and thus to insulate themselves from competitive pressures.
As product cycles become shorter, companies are under more pressure to innovate. 42% of the executives surveyed regard accelerating product development as one of the most important challenges for the next five years. 45% want innovations geared to reducing time to market.

IT changes business models

82% of those interviewed believe that technological advances will influence business models and strategies in the manufacturing industry. A large majority of 77% of executives see the main challenge here as acquiring business-critical expertise. Over half (55%) believe that IT’s main role in the company will be to increase competitive advantage instead of simply driving cost-efficiency.
The future role of IT will also include opening up larger parts of the corporate network to customers. When asked how IT can best facilitate the improvement of customer relationships, most survey respondents ranked expanding customer access to the network top. Manufacturers will strive to involve customers more extensively, for example, in product design. This will entail using communications networks to obtain specifications from customers and create interactive design platforms.

Main customers dictate location

Suppliers often have the decision to relocate dictated to them by their main customers. For the majority of manufacturing companies setting up production locations in emerging markets, the argument of the benefits of increased demand in these regions is more important than that of cost efficiency. According to the survey, 55% of manufacturing executives believe that China will offer the best business environment for growth between now and 2010. India comes in a distant second, cited by only 11% of respondents.
Francois Blanc, CIO of the global automotive parts supplier Valeo headquartered in France, sees few problems in relocating a production location. The most workable strategy is to wait until a main customer physically commits to a new location before deciding to move production. As their production is less complex than that of the automobile manufacturer, suppliers can set up a plant more quickly than the manufacturer, namely within 6-12 months. However, there is no golden rule for relocation. “Flexibility is the key,” stresses Blanc. Yet Valeo is not rushing in to seemingly alluring locations such as China and India – the company decides each case on its merits. As Valeo still believes itself to be too Europe-focused, the company is intending to increase its presence in the USA.

Relocation needs some consideration

Emerging markets often turn out to be more expensive than initially supposed once all costs – such as corrupt bureaucrats, macroeconomic imbalances, and a high political risk – have been factored in. Framework conditions such as a good infrastructure and secure company planning are particularly important for manufacturing companies that rely on high-value production assets. This is an important reason why the shift in production to emerging markets will be more attractive for lower value-added goods. Beyond the new EU members, cost-conscious, risk-averse companies are most likely to look to China. However, although average wages in China are lower than in central Europe, labor productivity, which includes unit wage costs, is not necessarily any higher in China.
“We count pennies and minutes of production time,” says George Varmuza, Emerson’s Managing Director for central and eastern Europe. Emerson, a US electrical goods manufacturer, has factories in the new EU countries Czech Republic, Poland, Hungary, and Slovakia. Almost all of the output from these factories is imported to western Europe. Varmuza believes that, as wages in these new EU states rise and the business environment improves in the poorer regions of Europe, manufacturers will have to rethink production locations. One of the candidate countries for production relocation is Romania, a market currently with 23 million consumers and hourly wage costs per worker of under $1. Both Romania and Bulgaria have the advantage that they must comply with regulatory reform measures before their EU accession in 2007, meaning that the political risks will diminish more quickly than in the still cheaper countries to the east. Varmuza says, “We don’t intend moving to Ukraine right now.”

Quality before price

When asked which of three factors – quality, price or personalization – will be most important to customers in 2010, 47% of the survey’s respondents cite product quality, while only 23% believe it will be price. A key problem of production relocation is ensuring quality standards. The big automobile manufacturers, which have shifted considerable production capacity to central Europe in recent years, are well aware of this. Manufacturers have difficulty in finding local companies able to match global quality standards for more sophisticated components. Even relatively simple components often lack durability. The struggle to find cheap local suppliers that can deliver on time and to the required standard is likely to endure for the foreseeable future.

Eckhard Rahlenbeck

Eckhard Rahlenbeck

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