Issues Facing Industrial Manufacturers: Staking a Claim in Emerging Markets

Issues Facing Industrial Manufacturers

Staking a Claim in Emerging Markets

2


Table of Contents

Introduction ................................................................................................................................... 3

Challenges in Emerging Markets ................................................................................................ 3

Intense Competition ........................................................................................................................ 3

International Business Risk ............................................................................................................. 3

Shortage of Skilled Manufacturing Labor ......................................................................................... 4

Achievable Solutions .................................................................................................................... 5

Build or Buy Production in New Markets .......................................................................................... 5

Improve the Return on Investment of Capital Equipment .................................................................. 5

Win the War for Talent ...................................................................................................................... 6

Use Foreign R&D to Create New Products ....................................................................................... 7

Conclusion .................................................................................................................................... 8

3


IntroductionIndustrial manufacturers have enjoyed surprising economic resilience and business growth in an extremely difficult global economy. Looking into the future, as developed economies in North America and Europe continue to struggle with low- or no-growth economies, emerging markets offer bountiful resources and new consumers who introduce new demands.

Once viewed mostly as a source of low-cost labor for global manufacturing, many emerging markets now have a rapidly growing middle class, robust business generation, and a developing economy. As businesses open to meet demand, they require viable suppliers. Many new multinational corporations are choosing to headquarter within the emerging world. From 2005-2009, the number of new multinational businesses founded annually in China nearly tripled. PricewaterhouseCoopers (PWC) predicts India will overtake China on this score by 2018 (Billings and McEvoy, p. 1).

Positioning a business to meet the growing industrial demands prevalent in the emerging markets of China, India, Brazil, Russia, Eastern Europe, and Central America is a key challenge for manufacturers. These young, burgeoning markets represent huge opportunities to develop new products and new customer bases, if manufacturers can leverage best practices to establish strong footholds. This paper explores some of the complex challenges involved in engaging new markets as well as creative solutions for improving operational efficiencies that manufacturers should consider when creating global strategic plans.

Challenges in Emerging Markets

Intense Competition

The potential for great gains comes with fierce competition. There is much opportunity in emerging markets—nearly one-third of the world’s people live in China and India alone. But these markets are also being pursued by every major player in the manufacturing industry, including many new companies starting up within the respective domestic markets. While multinational businesses may have access to more capital, domestic companies may have advantages in creating local supply lines, finding talented employees and partners, making the most culturally appealing sales pitch, and developing the right product fit.

International Business Risk

Deciding which emerging markets to enter and how to serve them is the most critical decision that multinational industrial manufacturers will have to make. A myriad of factors determine the business risk involved for each country, and these factors must be taken together and then weighed against

Positioning a business to meet the growing industrial demands prevalent in the emerging markets of China, India, Brazil, Russia, Eastern Europe, and Central America is a key challenge for manufacturers.

4


other prospective countries. Though not an exhaustive list, manufacturers should consider these aspects of any potential market:

• Environmental regulations

• Economic regulations

• Political stability

• Government incentives to attract foreign business

• Quality of capital markets

• International trade agreements

• Intellectual property and contract law

• Product liability law and litigation risk

• Sovereign debt levels and currency fluctuations

There are signs of a currency skirmish breaking out on a global scale as countries attempt to contain banking liquidity crises through currency easing and hold down the relative value of their currencies to increase the competitiveness of exports. If every country follows suit, this could be a zero-sum gain with no one gaining a clear advantage. Multinational businesses will have to monitor these developments very closely (Sivy, 2013).

Shortage of Skilled Manufacturing Labor

Industrial manufacturing is increasingly technical and technology-driven, requiring intelligent, specially trained workers. At the same time, there is a worldwide shortage of skilled manufacturing labor. The World Economic Forum predicts that “talented human capital will be the most critical resource differentiating the prosperity of countries and companies” and estimates that there are 10 million global manufacturing jobs that cannot be filled today, due to a “growing skills gap” (Moavenzadeh et. al, p. 4).

In emerging economies, there are fewer college graduates and less experience with complex manufacturing processes. In developed countries, manufacturing is often misperceived as a lower-value career. Many of the new jobs being created around the globe are in manufacturing, so the “war for talent” is heating up to become a key competitive threat.

Another potential HR challenge comes from rising labor costs. As emerging markets mature, wages for manufacturing workers are rising, and workers are demanding more benefits and working concessions. Increasing wages contribute to growing economies—good news for multinational companies looking to sell to consumers in emerging markets. But increases in wages and benefits may also offset the savings associated with manufacturing in these locations.

There are 10 million global manufacturing jobs that cannot be filled today.

5


Achievable Solutions

Build or Buy Production in New Markets

Many industrial manufacturers are already operating in emerging markets. For these companies, the question is not how to get started; the question is how to change a model that traditionally viewed emerging markets as a place to produce to now view them as a place to produce and sell.

For firms looking to enter a new emerging market, a decision must be made about how to establish a presence. Choices include acquisition of an existing business, forming a joint venture partnership, and building infrastructure from scratch. Questions to consider include:

• Acquisition: Can you get a jump start on a new market by purchasing an existing smaller manufacturer already doing business in the region?

• Partnership: Would partnering with a local business provide advantages in terms of navigating the permits and regulations required to conduct business there and understanding the local customer base?

• Building New Plants: Where will the new plants be sited? PWC recommends comparing total costs of each potential site, including “logistics, manpower and wage, utilities, construction, tax structure, and financing” and even more in order to get a complete picture (Graeme and McEvoy, p. 6). While lower labor costs may have been the main driver in choosing a particular market, surveys show that companies pay more attention to urban infrastructure (Internet access, roads, and police) than wage rates to determine where to place a plant in China (Zimmerman, 2012).

Manufacturers that decide to build new plants and manage their own construction may benefit by putting fixed asset management software in place prior to the build. It can keep track of an expensive plant and equipment that has not yet been placed in service and monitor budget to actuals for fixed assets during construction in progress.

Improve the Return on Investment of Capital Equipment

Entering new markets and building new manufacturing plants is expensive, so it is critical that manufacturers reduce costs wherever they can. Better fixed asset management is easy to achieve and results in savings that can be redeployed immediately in other areas of the business. Aberdeen Group discovered that by employing best practices in enterprise asset management, the best performing manufacturers reduced maintenance costs by 30% and achieved a 20% higher return on assets vs. plan (Ismail and Pacquin, 2012). Among the best practices noted, Aberdeen found that 68% of best-in-class manufacturers provided access to on-demand asset lifecycle information, including status and history.

Fixed asset management software can help manufacturers improve the return on their capital equipment in several ways. First, fixed asset management software provides an organized method for tracking essential information about equipment maintenance, including warranties, photos, and repair records. Implementing a more effective system of preventative maintenance for fixed assets

The question is not how to get started; the question is how to change a model that traditionally viewed emerging markets as a place to produce to now view them as a place to produce and sell.

6


can lengthen the life of expensive equipment in existing plants—allowing for more equipment purchases in new plants.

Fixed asset management software also accurately calculates depreciation of fixed assets according to the latest tax laws and depreciation rules. After comparing tax laws in the domestic and foreign markets, manufacturers may discover tax advantages in moving fully or mostly depreciated equipment from plants in North America to the newer plants abroad. Manufacturers can then replace that equipment with new fixed assets in North American plants, starting a new cycle of depreciation and taking advantage of any bonus depreciation rules if the asset qualifies. In addition to calculating and tracking depreciation, manufacturers can conduct inventories with fixed asset software in order to get an accurate picture of equipment before plant moves and determine the best assets to reallocate to any new plants.

Finally, keeping an accurate inventory of fixed assets enables manufacturers to get rid of assets that are broken or are not being used. Typically, midsized companies overpay property taxes and insurance by thousands of dollars due to out of service ghost assets—equipment that is broken, lost, or stolen—that remain on the books. Conversely, zombie assets are in-service assets that are not on the books—possibly uninsured and definitely not properly depreciated. Fixed asset software provides an up-to-date inventory and a “check-in/check-out” capability that will enable manufacturers to know the location and condition of all equipment to eliminate both ghost and zombie assets.

Win the War for Talent

There is a global shortage of skilled manufacturing talent, so it is essential that manufacturers recognize human resources as an essential part of the business and create a strategic plan for human capital as well as dedicate technology resources to the process. Some emerging markets, such as China or Brazil, have already experienced a boom in manufacturing; in these established manufacturing centers, manufacturers may be able to find skilled workers to staff new plants, but competition for the best talent will be fierce. In other emerging markets, it will be necessary to find good people and train them in manufacturing skills. In either case, it will be necessary to have a solid recruiting program, a positive corporate reputation among workers, and an effective onboarding, training, and development program. Since over 50% of human resources’ time is spent processing employee information and answering questions, in order to successfully execute on these initiatives simultaneously, human resources should be complemented by technology. An integrated software solution for automating and managing core workforce administration including payroll, benefits, attendance, and compliance is key to free up time for human resources to work on more strategic initiatives. Also, investing in tools that can increase retention and transform good employees into excellent employees can significantly impact your bottom line by decreasing employee turnover.

Developing a best practices recruiting program should not be seen solely as a talent management strategy; it is also a competitive strategy. Manufacturing firms should consider proactively recruiting key players such as researchers, engineers, top sales professionals, and good managers from competitors. Another good way to disrupt competitors is to hire their best recruiters! Additionally,

After comparing tax laws in the domestic and foreign markets, manufacturers may discover tax advantages in moving fully or mostly depreciated equipment from plants in North America to the newer plants abroad.

7


this process is strengthened by technology-enabled tracking, record keeping, and online integration. Luring top talent away from key competitors leaves the hiring manufacturer stronger and its competitor weaker. The employees of direct competitors cost less to train—they’re already familiar with the industry, manufacturing processes, and product markets (Johnson, 2011). The competitor is also forced to spend time and resources finding and training a replacement employee. Manufacturers should use appropriate caution with this strategy to stay on the right side of any laws regarding anticompetitive practices, as well as to avoid starting an all-out retaliatory recruiting war with a competitor.

Another potential solution to a global shortage of talent is the relatively recent but growing trend to reshore manufacturing production for U.S. markets. Surveys conducted in 2012 by MIT and Boston Consulting Group revealed that about 40% of American manufacturing firms surveyed had plans or were actively considering moving production to the U.S. By producing the goods sold in the U.S. market domestically, manufacturers can dedicate foreign workforces and plants to producing goods in emerging markets. Shipping and transportation costs can be reduced that way, too.

In the U.S., there are trained, available manufacturing workers who have lost positions over several decades of downsizing. Several federal initiatives are providing training and other incentives to improve the job skills of manufacturing workers (Selko, 2013). Additionally, global trends in labor costs are converging to make U.S.-based labor more affordable. Labor costs are rising in emerging markets; Chinese manufacturing workers enjoyed double-digit annual wage growth from 2000-2010 and benefit from a 2008 labor law that addresses contracts and worker concerns (The Economist, 2013). By contrast, American manufacturing wages declined, and many U.S. states adopted right-to-work laws to eliminate labor unions. In aggregate, these factors are starting to make a U.S. labor force more attractive for some U.S. and foreign manufacturers—especially to manufacture products that will be sold in North America.

Use Foreign R&D to Create New Products

Multinational manufacturers should invest in local research and development organizations within important emerging markets. Traditionally, firms have brought products to emerging markets by modifying them to suit the preferences and culture of customers in each marketplace. This process, called glocalization, should theoretically make products invented in developed economies attractive to consumers in emerging markets (Billings and McEvoy, p.8-9). But it doesn’t always work, and increasingly, manufacturers are recognizing the value of starting from scratch to solve problems for customers in emerging markets.

R&D teams in emerging markets innately understand the challenges and product needs of businesses in their own countries. They approach problems differently in an attempt to build things more quickly and at lower cost. This is very likely to produce more desirable products and can also lead to breakthroughs in manufacturing processes.

GE is investing heavily in a novel R&D strategy that it calls reverse innovation. This occurs when a product developed by an emerging market R&D team opens up new markets in the U.S. economy. For example, after studying the needs of rural healthcare in China and India, GE’s local R&D teams determined that the company’s traditional electrocardiogram and ultrasound machines were too

40% of American manufacturing firms surveyed had plans or were actively considering moving production to the U.S.

8


expensive and not portable enough. The Indian team started from scratch and developed a $1,000 handheld EKG device that was much better suited to emerging markets (van der Boor, 2012). In China, the R&D team developed a $15,000 ultrasound machine that sold for less than 15% the cost of a traditional ultrasound from GE (Immelt et al., 2009). By being small and inexpensive, these devices have also created new opportunities for GE Healthcare to sell them directly to doctors’ offices in the U.S.

ConclusionFor industrial manufacturers, emerging markets have long been a source of low-cost labor and now offer exciting opportunities for growth. Competition to sell to businesses in these countries will be intense, and manufacturers will have to carefully consider many factors—including labor availability and cost, local business laws and regulations, international trade agreements, and partnership opportunities—in order to determine the best markets to establish themselves. Before attempting to build a foothold in a new market, it is imperative that firms find extra capital by achieving their best possible operational efficiency.

Manufacturers will need to employ many solutions in order to establish themselves in new emerging markets. Firms looking to gain a stronger market presence and globalize must win the war for talent, develop profitable products, and operate with tremendous efficiency. Getting a better return on property and equipment can quickly raise capital and identify fixed assets that can be redeployed in emerging markets. It is relatively easy to extend the useful life of fixed assets, maximize the value of tax depreciation, and save money on taxes and insurance using affordable, easy-to-deploy fixed asset management software. By better leveraging the investment in property and equipment, manufacturers can improve both the cost and efficiency of North American operations while freeing up cash and personnel to focus on boosting global competitiveness.

9


References1. Billings, G. and McEvoy, E. (2011). PWC Manufacturing Excellence: Capturing Growth Markets.

www.pwc.com.

2. Immelt, J. R., Govindarajan, V., and Trimble, C. (2009). How GE Is Disrupting Itself. Harvard Business Review. September 21.

3. Ismail, N. and Paquin, P. (2012). Aberdeen Group.

4. Johnson, H. (2011). Secrets to Stealing Employees from Competitors. BusinessInsider, March 3.

5. Moavenzadeh, J., Philip,R., Giffi, C., and Thakker, A. (2012). The Future of Manufacturing: Opportunities to drive economic growth. World Economic Forum in conjunction with Deloitte & Touche.

6. N.A. (2013). Reshoring Manufacturing: Coming Home. The Economist, January 19.

7. Selko, A. (2013). Federal Initiatives to Support Reshoring. IndustryWeek. March 15.

8. Sivy, M. (2013.) Is the World on the Brink of a Currency War. Time. February 21.

9. van der Boor, P. (2012). The Emerging Market Era. Stanford Social Innovation Review.

10. Zimmerman, J. I. (2012). How U.S. Companies Decide Where to Locate Their Factories in China. The Atlantic Cities. March 6.

This report highlights general market conditions and decision making options. It is informational only and not meant as legal advice or for use as a substitution to legal advisement. Exceptions and special provisions are not covered, so you should consult your accounting professionals or lawyer for advice specific to your situation.

©2013 Sage Software, Inc. All rights reserved. Sage, the Sage logos, and the Sage product and service names mentioned herein are registered trademarks or trademarks of Sage Software, Inc., or its affiliated entities. All other trademarks are the property of their respective owners.

Sage

2325 Dulles Corner Blvd. Ste. 700 Herndon, VA 20171

www.SageFixedAssets.com

Issues Facing Industrial Manufacturers: Staking a Claim in Emerging Markets

Business

Transcript of Issues Facing Industrial Manufacturers: Staking a Claim in Emerging Markets